Precision Dyes is analyzing two machines to determine which one it should purcha

Question

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $512,000, annual aftertax cash outflows of $34,200, and a four-year life. Machine B costs $798,000, has annual aftertax cash outflows of $21,500, and has a six-year life. Whichever machine is purchased will be replaced at the end of its useful life. The firm should purchase Machine _____ because it lowers the firm's annual costs by approximately _______ as compared to the other machine.

Explanation / Answer

Machine A should be purchased as the cost of machine A is lessthan cost of machine B

Particulars Year Cash Flows PVF @ 14% PV Cash Outflows 0 512000                  1.00 512000 Cash Outflows 1 34200                  0.88 30000 Cash Outflows 2 34200                  0.77 26315.7895 Cash Outflows 3 34200                  0.67 23084.0259 Cash Outflows 4 34200                  0.59 20249.1455 Total Outflows 611648.961 PVAF                 2.91 Equal Annual Cash flows    209,920.85

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