A company is considering buying a new piece of machinery. A 10% interest rate will be used in the computations. Two models of the machine are available.
Machine I
Initial cost:$80,000
End -of -useful –life Salvage value, S: 20,000
Annual operating cost 18,000
Useful life, in years 20
Machine II
Initial cost: $100,000
End -of -useful –life Salvage value, S: 25,000
Annual operating cost: 15,000 first 10 years, 20,000 thereafter
Useful life, in years: 25
(a) Determine which machine should be purchased, based on equivalent uniform annual cost.
(b) What is the capitalized cost of Machine I?
(c) Machine I is purchased and a fund is set up to replace Machine i at the end of 20 years. Compute the required uniform annual deposit.
(d) Machine I will produce an annual saving of material of $28,000. What is the rate of return if Machine I is installed?
(e) What will be the book value of Machine I after 2 years, based on sum -of -years' -digits depreciation?
(f) What will be the book value of Machine II after 3 years, based on double declining balance depreciation?