1 * Netq plc manufactures Qtrans, for which demand fluctuates seasonally. Netq has two machines,…

1* Netq plc
manufactures Qtrans, for which demand fluctuates seasonally. Netq has two
machines, each with a productive

capacity of 1,000 Qtrans per year. For four months of
the year each machine operates at full capacity. For

a further four months the machines operate at
three-quarters of their full capacity and for the remaining months

they produce at half capacity. The operating cost of
producing a Qtran is 4 and the machines are expected to be

productive to an indefinite horizon. Netq is
considering scrapping the old machines (for which the firm will receive

nothing) and

1* Netq plc
manufactures Qtrans, for which demand fluctuates seasonally. Netq has two
machines, each with a productive

capacity of 1,000 Qtrans per year. For four months of
the year each machine operates at full capacity. For

a further four months the machines operate at
three-quarters of their full capacity and for the remaining months

they produce at half capacity. The operating cost of
producing a Qtran is 4 and the machines are expected to be

productive to an indefinite horizon. Netq is
considering scrapping the old machines (for which the firm will receive

nothing) and replacing them with new improved
versions. These machines are also expected to last forever if properly

maintained but they cost 7,000 each. Each has an
annual capacity of 1,000 Qtrans. Operating costs (including

maintenance) will, however, fall to 1.80 per Qtran.
The appropriate cost of capital is 13 per cent. Should Netq

replace both of its machines, one of them, or
neither? Assume output is the same under each option and that the new

machines have the same productive
capacity as the old.

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