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XYZ, Inc. is considering buying a machine for manufacturing components. There are two types of...

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Finance

XYZ, Inc. is considering buying a machine for manufacturing components. There are two types of machines available in the market that will perform the task:

  • Machine A: Uses "green" technology and therefore is eligible for tax rebate (reduction in taxes). It costs $870,000 and has a useful life of 5 years. It will be depreciatedtozerousing straight-linedepreciationoverfiveyears, startingfromYear
    1. The tax rebate is $240,000 total spread equallyover 5 years (this means XYZcan reduceitstaxbillby240,000/5=$48,000each yearin years1-5).Themachinehas no salvage value at the end of its life.
  • Machine B: Uses "conventional" technology and therefore is not eligible for tax rebates. It costs $680,000 and has a useful life of 5 years. It will be depreciated to zero using straight-line depreciation over five years, starting from Year 1. The machine has no salvage value at the end of its life.

Thetaxrateis 25%.The costof capitalis 8%. Which machineshould XYZ buy?

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