For this problem, you might also want to consult the textbook. Bennys 30Bakery is considering...
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For this problem, you might also want to consult the textbook. Bennys 30Bakery is considering the replacement of its donut hole maker. The current machine costs $2,700 per year to run and will last for three more years. After three years, the machine will be worthless and Benny will have to replace it. Alternatively, Benny can replace the current machine with a new one that costs $10,000 and has annual costs of $2,000 per year. The new machine will last 10 years after which time Benny will replace it with an identical machine with identical costs. The old machine has the following scrap values at the beginning of the year in question (in USD):
Year
Scrap Value
0
3,000
1
2,250
2
1,250
3
0
The cost of capital to the firm is 14%. Assume that the revenues generated by each machine are identical and ignore taxes. When should Benny replace the current donut hole maker?
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