Question

Your answer is incorrect. Try again. Monty Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $900 per year for the first 5 years, $1,900 per year for the next 10 years, and $2,900 per year for the last 5 years. Following is each vendor’s sales package. Vendor A: $57,710 cash at time of delivery and 10 year-end payments of $17,430 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,510. Vendor B: Forty semiannual payments of $10,100 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge. Vendor C: Full cash price of $158,200 will be due upon delivery. Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Monty’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following: Click here to view factor tables The present value of the cash flows for vendor A. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is--- The present value of the cash flows for vendor B. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is----- The present value of the cash flows for vendor C. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is ------- From which vendor should the press be purchased? The press should be purchased from------

Answer 1

Vendor A

Year	Cash outflow for press	Cash outflow for repairs	Total Cash outflow	Present value factors @10%	Present value of cash flows
0	57710	10510	68220	1	68220
1	17430		17430	0.90909	15845.44
2	17430		17430	0.82645	14405.02
3	17430		17430	0.75131	13095.33
4	17430		17430	0.68301	11904.86
5	17430		17430	0.62092	10822.64
6	17430		17430	0.56447	9838.712
7	17430		17430	0.51316	8944.379
8	17430		17430	0.46651	8131.269
9	17430		17430	0.4241	7392.063
10	17430		17430	0.38554	6719.962
					175320

The present value of the cash outflows for this option is $175,320.

Vendor B

Present value of annuity = $A\frac{1-(1+r)^{-n}}{r}$ = $10100\frac{1-1.05^{-40}}{.05}$ = 10100 * 17.15909 = 173307

The present value of the cash outflows for this option is $173,307

Vendor C

Year	Cash outflow for press	Cash outflow for repairs	Total Cash outflow	Present value factors @10%	Present value of cash flows
0	158200	0	158200	1	158200
1		900	900	0.90909	818.181
2		900	900	0.82645	743.805
3		900	900	0.75131	676.179
4		900	900	0.68301	614.709
5		900	900	0.62092	558.828
6		1900	1900	0.56447	1072.493
7		1900	1900	0.51316	975.004
8		1900	1900	0.46651	886.369
9		1900	1900	0.4241	805.79
10		1900	1900	0.38554	732.526
11		1900	1900	0.35049	665.931
12		1900	1900	0.31863	605.397
13		1900	1900	0.28966	550.354
14		1900	1900	0.26333	500.327
15		1900	1900	0.23939	454.841
16		2900	2900	0.21763	631.127
17		2900	2900	0.19784	573.736
18		2900	2900	0.17986	521.594
19		2900	2900	0.16351	474.179
20		2900	2900	0.14864	431.056
					171492

The present value of the cash outflows for this option is $171,492.

Thus, the press should be purchased from vendor C

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