Precision dyes is analyzing two machines to determine which one it should purchase. the company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. machine a has a cost of $512,000, annual operating costs of $34,200, and a four-year life. machine b costs $798,000, has annual operating costs of $21,500, and has a six-year life. whichever machine is purchased will be replaced at the end of its useful life. the firm should purchase machine because it lowers the firm's annual costs by approximately as compared to the other machine.

It would Pick Machine A

as it saves 16,790.73 as compared with machine B

Explanation:

We will calcualtethe present value of each machine.

But we have a problem, because one machine life is 4 years, and the other is 6 years. So to compare we need to match their useful life

4 year machine A and we have 6 years machine B

We will calculate the present worth for machine A

MACHINE A

C34200

time6

rate0.14

PV$99,648.96

Then we calculate the Net Worth

512,000 + 99,649 = 611,649

Now we do the same for Machine B

MACHINE B

C21500

time6

rate0.14

PV$83,606.35

Net Worth 798,000 + 83,606.35 = 881,606

Now how do we compare the 4 year machine with the 6 year machine ?

We will check which annuity payment equals the net worth for each project at our cost of capital rate

MACHINE A

PV$611,649

time4

rate0.14

C-209,920.86

MACHINE B

PV$881,606.00

time6

rate0.14

C-226,711.59

Now we compare each annuity:

-209,920.86 - (-226,711.59) = 16,790.73

the answer is d

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