Your engineering firm needs a rapid prototyping machine. The company gives you two options. In Option 1 you purchase the machine outright for $50,000, pay a maintenance contract of $1,000 per year (paid in advance at the beginning of each year), and expect to be able to resell the machine after 10 years at a salvage value of $10,000. In Option 2, you lease the machine at $7,000 per year (paid in advance at the beginning of each year) and pay no maintenance, but receive no salvage. Assume that you will be able to take in $8,000 per year in income from this machine. Also assume that an additional option is not to buy the machine at all, but to put the money in the bank at 5% nominal interest rate, compounded annually. Which option will be best for the firm?

Your engineering firm needs a rapid prototyping machine. The company gives you two options. In Option 1 you purchase the machine outright for $50,000, pay a maintenance contract of $1,000 per year (paid in advance at the beginning of each year), and expect to be able to resell the machine after 10 years at a salvage value of $10,000. In Option 2, you lease the machine at $7,000 per year (paid in advance at the beginning of each year) and pay no maintenance, but receive no salvage. Assume that you will be able to take in $8,000 per year in income from this machine. Also assume that an additional option is not to buy the machine at all, but to put the money in the bank at 5% nominal interest rate, compounded annually. Which option will be best for the firm?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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