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CAPITAL BUDGETING:
QUESTION
A firm is considering to install a large stamping machine. Two machines currently being marketed will
do the job satisfactorily. Machine A costs $ 50,000 and will require cash running expenses of $ 15,000
per year. It has useful life of 6 years and is expected to yield $ 2,000 salvage value at the end of its useful
life. Machine B costs $ 65,000 but cash running expenses are expected to be $ 12,000 This machine is
expected to have useful life of 10 years with salvage value of $ 5,000 Both the machine would be
depreciated on straight line basis.
If the corporate tax rate is 50% and cost of capital is 10% , which machine should be bought by the
company. Document Preview:

CAPITAL BUDGETING: QUESTION A firm is considering to install a large stamping machine. Two machines currently being marketed will do the job satisfactorily. Machine A costs $ 50,000 and will require cash running expenses of $ 15,000 per year. It has useful life of 6 years and is expected to yield $ 2,000 salvage value at the end of its useful life. Machine B costs $ 65,000 but cash running expenses are expected to be $ 12,000 This machine is expected to have useful life of 10 years with salvage value of $ 5,000 Both the machine would be depreciated on straight line basis. If the corporate tax rate is 50% and cost of capital is 10% , which machine should be bought by the company.

Attachments:

question-1.pdf