Question

Answer question 1,2,3 please

2. (Total 3.5 Points) Hindustan Motors is considering the purchase of one of two machines required in its production process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for each year of its three-year life. Either machine must be replaced at the end of its life. The costs are expressed in real terms. Please answer the following questions: (1) Suppose you're the financial manager of Hindustan Motors. If you had to buy or the other machine and rent it to the production manager for that machine's economic life, what rental annual payment would you have to charge? Assume a 15% real discount rate and ignore taxes. (0.5 Points) a. Machine A for $163.80, and Machine for $181.33 b. Machine A for $100.76, and Machine for $79.42 c. Machine A for $157.28, and Machine for $201.93 d. Machine A for $98.62, and Machine for $75.89 Calculation Details (1.5 Points) (2) Which machine should Hindustan buy (0.5 Points)? Why? (0.5 Points) (3) Suppose you do actually buy one of those machines and rent it to the production manager. How much would you actually have to charge in each future year if there is steady 5% per year inflation? (0.5 Points)

Answer 1

Answer 2

PArt1:

WE will calculate the equivalent annual cost for each machine.

EAC = (initial costs/annuity factor)+ annual maintainance

annuity factor = [1-(1/(1+r)^n]​/r

where:r=Cost of capitalt=Number of periods​

annuity factor for machine A =

r = 15% , n =2

=[1-(1/1.15)^2]/0.15 = 1.625

EAC of machine A =

initial cost = 50 , annual maintainance = 70

EAC = 50/1.625+70

= 100.76

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annuity factor for machine B

r = 15% , n =3

annuity factor = =[1-(1/1.15)^3/0.15 = 2.28

initial cost = 90 , annual maintainance = 40

EAC = 90/2.28 + 40

= 79.42

Option B

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Answer 2

We have standardized the annual cost and in capital budgeting , cost is the only issue. Hence machine B should be selected as it has an EAC which is $21.34 lower than machine A.

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Answer 3

inflation = 5%

new rental = 79.42*(1.05)^3

= $91.94