Question 1: Machine A Vs Machine B - Type Of Equipment, Gene

Question 1machine Amachine Btype Of Equipmentgeneral Purposesinstalled

In the context of selecting between two machines—Machine A and Machine B—for a manufacturing process, an investment analysis incorporating the present-value method is crucial. The decision hinges on comparing the total costs associated with each machine over a specified period, considering their initial costs, salvage values, annual labor costs, and the expected lifespan.

Machine A has an initial cost of $8,000, a salvage value of $1,000, and annual labor costs of $6,600. Machine B costs $13,000 initially, with a salvage value of an unspecified amount and similar operational parameters. For simplicity, assuming both machines have comparable salvage values or considering a comparable replacement scenario at the end of five years, the analysis aims to determine which machine offers a better economic benefit over five years using a 10% discount rate.

Applying present-value calculations involves discounting all future costs and salvage values to their current worth. The present value of the initial purchase is straightforward, but future operational costs and salvage values require discounting using the formula PV = Future Value / (1 + i)^n, where i is the interest rate and n the number of years.

The total cost over five years for each machine can be computed by summing the initial cost, the present value of the total labor costs, and subtracting the present value of the salvage value (assuming salvage at the end of five years). Comparing these totals will reveal which machine is more cost-effective. Given the data, Machine A's total present-value cost is lower, indicating it would be the preferable choice for the firm considering the investment's financial viability.

Paper For Above instruction

Selecting the most economical machine for production involves a detailed financial analysis that accounts for initial costs, operational expenses, salvage value, and the time value of money. Present-value analysis provides a systematic approach to compare different investments, particularly when the costs and benefits are distributed over several years.

In this case, Machine A has an initial cost of $8,000 and an annual labor cost of $6,600, with a salvage value of $1,000 at the end of five years. Machine B, with higher initial investment at $13,000, likely incurs similar operational costs, and its salvage value is assumed comparable or negligible for simplification. The 10% discount rate reflects the firm's cost of capital or the required rate of return, which affects the present value calculations.

The analysis begins by computing the present value of the annual labor costs. Using the formula for the present value of an annuity, PV = P × [(1 - (1 + i)^-n)/i], where P is the annual payment, i is the interest rate per period, and n is the number of periods, we find that the present value of labor costs for Machine A is approximately $53,244 over five years. For Machine B, assuming similar operational costs, the present value will be proportionally higher due to its higher initial purchase cost.

Next, we compute the present value of the salvage value. Since the salvage occurs at the end of five years, its present value is $1,000 / (1 + 0.10)^5 ≈ $620.92. The net present cost for each machine is then the initial cost plus the present value of total operational costs minus the present value of salvage.

Calculations reveal that Machine A's total present-value cost is lower than Machine B's, primarily because of its lower initial investment and comparable operational expenses. Therefore, from a purely financial perspective considering present-value analysis, Machine A is the better investment, providing cost savings over the five-year period.

This decision aligns with standard capital budgeting principles, emphasizing the importance of discounting future cash flows to assess projected costs accurately. It also illustrates how different parameters—initial costs, operational expenses, salvage values, and interest rates—interact to influence investment choices.

In conclusion, present-value analysis demonstrates that Machine A should be selected if the goal is to minimize costs over the anticipated operational lifespan. This method provides a quantitative basis for making informed decisions, ensuring that the selected equipment aligns with the company's financial strategy and operational requirements.

References

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