Question 1 Kingston Plc is considering the purchase of a new...

Question 1

Kingston Plc is considering the purchase of a new machine. It has identified two possible machines with initial costs and expected cash savings per year as follows:

Machine A has a useful life of 4 years while machine B has a useful life of 3 years. Neither of these machines has any residual value at the end of their lives. The two machines are mutually exclusive. The opportunity cost of capital for Kingston Plc is 9% per year. If Kingston Plc is going to replace the chosen machine each time when it reaches the end of its useful life, which machine would you recommend the management to invest?

(a)   The equivalent annual values of machine A, B are £6,330 and £4747, respectively. A should be bought. 

(b)   The equivalent annual values of machine A, B are £5,000 and £6797, respectively. B should be bought. 

(c)    The equivalent annual costs of machine A, B are £4,676 and £5,778, respectively. B should be bought. 

(d)   The equivalent annual costs of machine A, B are £4,678 and £4,557, respectively. A should be bought.