Question

Cullumber 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 $1,050 per year for the first 5 years, $2,050 per year for the next 10 years, and $3,050 per year for the last 5 years. Following is each vendor’s sales package.

Vendor A: $55,180 cash at time of delivery and 10 year-end payments of $17,350 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 $9,940.

Vendor B: Forty semiannual payments of $9,330 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 $150,600 will be due upon delivery.

Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Cullumber’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following:

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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?

Answer 1

i) Vendor A Payment Cash at the time of delivery 10 year end payments Maintenance-one time cost Total Present value of cash outflows $55,180 $17,350 $9,940 PV factor PV of Cash at 10% outflows 1.00000 $55,180 6.14457 $106,608 1.00000 $9,940 $171,728 ii) Vendor B PV factor Payment 5% for 40 payments $9,330 18.01704 PV of Cash outflows 40 semi annual payments $168,099 Note: 5% is taken for Vendor B since 10% is annual and semi-annual is 5% iii) Vendor C Payment PV factor PV of Cash at 10% outflows 1.00000 $150,600 $150,600 Cash price Maintenance first 5 years next 10 years last 5 years Total Present value of cash outflows $1,050 $2,050 $3,050 3.79079 3.81529 0.90748 $3,980 $7,821 $2,768 $165,170 Conclusion: Press should be purchased from Vendor