Response to the following problem:
A firm is considering the purchase of two different pieces of equipment, X and Y. Both will perform the same task and have identical capacity. The proposed project is expected to be replicated (replaced), rather than terminated at the end of the machine's life.
Using a required rate of return of 10% p.a. for both pieces of equipment and relevant calculations, explain which machine you would recommend the firm purchase.
|
Machine
|
Initial Cost
|
Annual Cost
|
Machine Life
|
|
X
|
$15 000
|
$5 000
|
2 years
|
|
Y
|
$20 000
|
$9 000
|
3 years
|