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Anton [14]
3 years ago
6

Machines J and K have the following investment and operating costs: Year 0 1 2 3 J 11000 1200 1300 K 13000 1200 1300 1400 Which

machine is a better buy at a WACC of 10.5%
Business
1 answer:
Naily [24]3 years ago
6 0

Answer:

Machine K

Explanation:

The values can be better computed as:

 Year     0          1           2         3

J         11000   1200      1`300

K         13000   1200     1300    1400

Using the PV Calculator

The Present Value (PV) for each year in Machine J is as follows:

Cashflow    Year      Present Value

11000           0             11000

1200             1              1085.97

1300             2              1064.68

Total                            13,150.65

The effective annual cost = \dfrac{NPV\times r}{1-(1+r)^{-n}}

=\dfrac{13150.65 \times 0.1050}{1-(1+0.1050)^{-2}}

= $7628.16

Using the PV Calculator

The Present Value (PV) for each year in Machine K is as follows:

Cashflow    Year      Present Value

13000           0             13000

1200             1              1085.97

1300             2             1064.68

1400             3             1037.63

Total                            16,188.28

The effective annual cost = \dfrac{NPV\times r}{1-(1+r)^{-n}}

=\dfrac{16188.28 \times 0.1050}{1-(1+0.1050)^{-3}}

= $6566.92

Therefore, machine K is better to buy than machine J.

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1) attached below

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