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How evaluate each machine using the shortest-common-period

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Reference no: EM132986958

The directors of XYZ Ltd. are considering whether to invest in two separate projects: one is small while the other is large. The company has a cost of capital of 12% (hint: the discount rate).

The directors are considering buying a new machine, which should lead to cost savings. Two machines that are suitable for the business are on the market. These machines have the following outlays and expected cost savings:

                             Alpha machine          Beta machine

Initial outlay              (15,000)                 (30,000)

Cost savings

1 year's time                6,000                       8,000

2 years' time                    10,000               11,000

3 years' time                          -                12,000

The business will have a continuing need for whichever machine is chosen.

Required:

Problem 1. Evaluate each machine using both the shortest-common-period-of-time approach and the equivalent-annual-annuity approach. (All workings should be to two decimal places)

Problem 2. Which machine would you recommend and why?

Reference no: EM132986958

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