Precision tool is analyzing two machines

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Reference no: EM131826393

Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has an initial cost of $892,000, annual maintenance cost of $28,200, and a 4-year life with a market salvage value of $50,000. Machine B costs $1,118,000 initially, has annual maintenance costs of $19,500, and a 5-year life with a market salvage value of $65,000. Both machines will be depreciated straight-line to zero. Whichever machine is purchased will be replaced at the end of its useful life. Assuming a 35% tax rate, Precision Tool should purchase Machine _____ because it lowers the firm's annual cost by approximately _______ as compared to the other machine. Please explain and show your work.

Reference no: EM131826393

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