As a result of improvements in product engineering, UnitedAutomation is able to sell one of its two milling machines. Bothmachines perform the same function but differ in age. The newermachine could be sold today for $77,000. Its operating costs are$23,600 a year, but in five years the machine will require a$18,200 overhaul. Thereafter operating costs will be $31,800 untilthe machine is finally sold in year 10 for $7,700.
The older machine could be sold today for $26,800. If it iskept, it will need an immediate $29,000 overhaul. Thereafteroperating costs will be $38,000 a year until the machine is finallysold in year 5 for $7,700.
Both machines are fully depreciated for tax purposes. Thecompany pays tax at 35%. Cash flows have been forecasted in realterms. The real cost of capital is 10%.
a. Calculate the equivalent annual costs forselling the new machine and for selling the old machine.(Do not round intermediate calculations. Enter your answersas a positive value rounded to 2 decimal places.)
| Equivalent Annual Cost |
| Sell new machine | $ |
| Sell old machine | $ |
|
b. Which machine should United Automationsell?
| Sell old machine |
| Sell new machine |
