Calculate Choosing Between Two Machines

Question

Garden Farrell Company is considering purchasing one of the following two pieces of gardening equipment.

Equipment A has a purchase price of $3 million and will cost $80,000, pre-tax, to operate on an annual basis. This equipment will have to be replaced every 7 years and
has a salvage value of $340,000.

Equipment B on the other hand, has an initial cost of $3.8 million and costs $69,000, pretax, annually to operate. This equipment has a useful life of 9 years with a salvage value of $420,000. Both equipment sets are in an asset class with a CCA Rate of 25% and are otherwise identical. The income tax rate is 38 percent and the appropriate discount rate is 13%.

Which equipment should the company purchase and why?

Summary

The question belongs to Finance and it discusses about calculating about choosing between two equipments A and B by a company.

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