You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years costs $1000
initially and then $300 per year in maintenance costs. Machine B costs $1300 initially has a life of three years and requires $200 in annual maintenance
costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 8% and
the tax rate is zero.
Your company has spent $400000 on research to develop a new computer game. The firm is planning to spend $600000 on a machine to produce the
new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50000. The machine will be used for 3 years has a
$100000 estimated resale value at the end of three years and will be depreciated straight line over 4 years. Revenue from the new game is expected to be
$800000 per year with costs of $300000 per year. The firm has a tax rate of 35 percent an opportunity cost of capital of 8 percent and it expects net
working capital to increase by $150000 at the beginning of the project. Should you proceed with this project? Explain.