A company is evaluating two new machines, and the one chosen will be replaced on

Question

A company is evaluating two new machines, and the one chosen will be replaced on a perpetual basis (at the same cost and effects on OCF). Both machines will generate $10 million in annual sales, the tax rate for both is 35%, and the required return. Given the following detail on each machine, which one would you choose?

Machine X costs $2,900,000, lasts 6 years, has variable costs of 35% of sales, and fixed costs of $130,000 per year.


Machine Y costs $5,100,000, lasts 9 years, has variable costs of 30% of sales, and fixed costs of $130,000 per year.

Explanation / Answer

machine X because fixed costs are same but initial cost for X is less and it turns out be profitable

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