Cherry, Inc., currently has a machine that costs $10,000 per year to operate. The machine can produce 50,000 units per year. Three years ago the company borrowed $200,000 to purchase the machine; it still owes $125,000 of that amount. Cherry could sell the machine for $70,000 and purchase a new, more efficient machine at a cost of $220,000. The new machine can produce 85,000 units per year; its annual operating costs would be $12,000.Indicate whether each piece of information in this scenario is relevant or irrelevant to the decision to purchase the new machine. Operating cost of old machine RelevantIrrelevant Production of old machine RelevantIrrelevant Purchase price of old machine RelevantIrrelevant Loan balance RelevantIrrelevant Market value of old machine RelevantIrrelevant Cost of new machine RelevantIrrelevant Production of new machine RelevantIrrelevant Operating cost of new machine RelevantIrrelevant
Cherry, Inc., currently has a machine that costs $10,000 per year to operate. The machine can produce 50,000 units per year. Three years ago the company borrowed $200,000 to purchase the machine; it still owes $125,000 of that amount. Cherry could sell the machine for $70,000 and purchase a new, more efficient machine at a cost of $220,000. The new machine can produce 85,000 units per year; its annual operating costs would be $12,000.Indicate whether each piece of information in this scenario is relevant or irrelevant to the decision to purchase the new machine. Operating cost of old machine RelevantIrrelevant Production of old machine RelevantIrrelevant Purchase price of old machine RelevantIrrelevant Loan balance RelevantIrrelevant Market value of old machine RelevantIrrelevant Cost of new machine RelevantIrrelevant Production of new machine RelevantIrrelevant Operating cost of new machine RelevantIrrelevant
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...
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Question
Cherry, Inc., currently has a machine that costs $10,000 per year to operate. The machine can produce 50,000 units per year. Three years ago the company borrowed $200,000 to purchase the machine; it still owes $125,000 of that amount. Cherry could sell the machine for $70,000 and purchase a new, more efficient machine at a cost of $220,000. The new machine can produce 85,000 units per year; its annual operating costs would be $12,000.
Indicate whether each piece of information in this scenario is relevant or irrelevant to the decision to purchase the new machine.
Operating cost of old machine |
RelevantIrrelevant
|
|
Production of old machine |
RelevantIrrelevant
|
|
Purchase price of old machine |
RelevantIrrelevant
|
|
Loan balance |
RelevantIrrelevant
|
|
Market value of old machine |
RelevantIrrelevant
|
|
Cost of new machine |
RelevantIrrelevant
|
|
Production of new machine |
RelevantIrrelevant
|
|
Operating cost of new machine |
RelevantIrrelevant
|
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