Question

Hollywood Tabloid needs a new state-of-the-art camera to produce its monthly magazine. The company is looking at two cameras that are both capable of doing the job and has determined the following: 

Camera 1 costs $6,000. It should last for eight years and have annual maintenance costs of $300 per year. After eight years, the magazine can sell the camera for $300. 

Camera 2 costs $5,500. It will also last for eight years and have maintenance costs of $900 in year three, $900 in year five, and $1,000 in year seven. After eight years, the camera will have no resale value. (FV of $1. PV of $1. FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answers to 2 decimal places.) 

Required: 

1-a. Assume that an interest rate of 9% properly reflects the discount rate in this situation and that maintenance costs are paid at the end of each year. Determine the total cost of cameras. 

1-b. Which camera should Hollywood Tabloid purchase?

Answer 1

Camera 1

Cost incurred today = $6,000

Maintenance Cost for 8 years = $300 per year

Resale value of camera after 8 years = $300

Total cost of the Camera = Cost incurred today + Present value of total maintenance cost - Present value from sale of camera

Present value of total maintenance cost = $300 * present value annuity factor @9% for 8 years = $300 * 5.5348 = $1,660.44

Present value from sale of camera = $300 * Present value factor @9% for 8th year = $300 * 0.5019 = $150.57

Total cost of the Camera = $6,000 + $1,660.44 - $150.57 = $7,509.87

Camera 2

Cost incurred today = $5,500

Maintenance cost = $900 in year 3, $900 in year 5 and $900 in year 7

Resale value = 0

Total cost of the Camera = Cost incurred today + Present value of total maintenance cost

Present value of total maintenance cost = ( $900 * Present value factor @9% for 3rd year ) + ( $900 * Present value factor @9% for 5th year ) + ( $900 * Present value factor @9% for 7th year ) = ( $900 * 0.7722) + ( $900 * 0.6499) + ( $900 * 0.5470) = $1,772.19

Total cost of the Camera = $5,500 + $1,772.19 = $7,272.19