1. A machine costing $30,000 to buy and $2,750 per year to operate will save mainly labor expenses in packaging over eight years. The anticipated salvage value of the machine at the end of eight years is $2,500.

a. If a 9% return on investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine?

b. If the service life is seven years instead of eight, what is the minimum required annual savings in labor for the firm to realize a 10% return on investment?

c. If the annual operating cost increases by 20%, from $2,750 to $3,300, what would the minimum required annual savings to get the 10% return on investment?

2. A company is looking at purchasing new vehicles to enhance their fleet. Which of the following vehicles would be the best in terms of lowest annual cost if the interest rate = 10% if the vehicles had a service life of 4 years? 5 years? 6 years?

Vehicle          Initial Cost        Annual Operating Cost        Salvage Value

A               $32,000                      $4,250                             $6,000

B               $28,000                      $5,000                             $4,000

C               $30,000                      $4,750                             $5,000

D               $34,500                      $5,000                             $7,000

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