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    javy1028's Avatar
    javy1028 Posts: 1, Reputation: 1
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    #1

    May 16, 2012, 05:22 PM
    Capital Budgeting Problem
    Small Appliances, Inc. is considering starting a new line of business with the excess capacity it currently has on its rivet machine. The current machine is expected to last four years at the current rate of production. However, if a new line of business is taken on, then the machine will have to be replaced in three years instead of four. A new machine that will last four years would cost $50,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 9 percent cost of capital.
    arunavcd's Avatar
    arunavcd Posts: 89, Reputation: 3
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    #2

    May 28, 2012, 05:53 PM
    Quote Originally Posted by javy1028 View Post
    Small Appliances, Inc., is considering starting a new line of business with the excess capacity it currently has on its rivet machine. The current machine is expected to last four years at the current rate of production. However, if a new line of business is taken on, then the machine will have to be replaced in three years instead of four. A new machine that will last four years would cost $50,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 9 percent cost of capital.
    New Machine Costs $50k dollars and that is the cost. Discount factor at 9% would not matter if the Capital outlay of $50k is payable immediately (year 0). If it is given in two or more years, discount factor would have impact on the cost.
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