What annual rental payment would you have to charge

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Question - The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs:

Year Machine A Machine B

0 $49,500 $59,500

1 11,900 11,800

2 11,900 11,800

3 11,900+ replace 11,800

4  11,800 + replace

These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 7% per year. There will be new machines in year 1 that cost 7% less to buy and operate than A and B. In year 2 there will be a second crop of new machines incorporating a further 7% reduction, and so on.

Suppose you are Borstal's financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine's economic life, what annual rental payment would you have to charge given the expected technological changes? Assume a 11% real discount rate and ignore taxes.

Reference no: EM132999702

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