Question

Esquire Company needs to acquire a molding machine to be used in its manufacturing process Two types of machines that would be appropriate are presently on the market. The company has determined the following FV of St PV O SLEVA PVA of $. FVAD OF $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $15,000. It will last 10 years with annual maintenance costs of $500 per year. After 10 years the machine can be sold for $1,575 Machine B could be purchased for $12.500. It also will last 10 years and will require maintenance costs of $2,000 in year three $2.500 in years, and $3,000 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year kirke income tax considerations Calculate the present value of Machine AS Machine which machine Esquare should purchase? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) Machine A Machine Egure should purchase

Answer 1

To calculate present value we would use PV of $1 and PVA of $1
Calculation of present value of machine A
	Cash flow	PV table	Discount factor	Present value
Purchases	-$15,000		1	-$15,000
Annual maintenance	-$500	PVA of $1 (i=8%,n=10)	6.71008	-$3,355
Salvage value	$1,575	PV of $1 (i=8%,n=10)	0.46319	$730
Present value				-$17,626
Calculation of present value of machine B
	Cash flow	PV table	Discount factor	Present value
Purchases	-12500		1	-$12,500
Annual maintenance	-2000	PV of $1 (i=8%,n=3)	0.79383	-$1,588
Annual maintenance	-2500	PV of $1 (i=8%,n=6)	0.63017	-$1,575
Annual maintenance	-3000	PV of $1 (i=8%,n=8)	0.54027	-$1,621
Present value				-$17,284
Esquire should acquire machine B as it has lower cash outflow then machine A