Question

I need help determining the present value of the costs for machine A.

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:

Machine A could be purchased for $49887. It will last 10 years with annual maintenance costs of $1191 per year. After 10 years the machine can be sold for $5101.

Machine B could be purchased for $36041. It also will last 10 years and will require maintenance costs of $4147 in year three, $4095 in year six, and $5125 in year eight. After 10 years, the machine will have no salvage value.

Required: Determine the present value of the costs for Machine A. 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. Ignore income tax considerations.  Answer in dollars and cents ($ 0.00 ).

Answer 1

Present value of Payments
Year	Cash In flows (Outflows)	Discounting factor @8%	Present value
0	$ (49,887.00)	1.00000	$ (49,887.00)
1	$    (1,191.00)	0.92593	$    (1,102.78)
2	$    (1,191.00)	0.85734	$    (1,021.09)
3	$    (1,191.00)	0.79383	$        (945.45)
4	$    (1,191.00)	0.73503	$        (875.42)
5	$    (1,191.00)	0.68058	$        (810.57)
6	$    (1,191.00)	0.63017	$        (750.53)
7	$    (1,191.00)	0.58349	$        (694.94)
8	$    (1,191.00)	0.54027	$        (643.46)
9	$    (1,191.00)	0.50025	$        (595.80)
10	$    (1,191.00)	0.46319	$        (551.66)
10	$      5,101.00	0.46319	$      2,362.75
Present value			$ (55,515.96)

Residual value is a cash inflow and shall be reduced from cost of asset to calculate Present value of asset.

Present value =$55,515.96

Please note that answer may vary due to decimal places in PV factor.

If your answer does not match give a comment below.

Initial cost of Investment is not discounted because it is paid in the beginning of the year.

Year	PV FACTOR @ 8%
1	0.92593
2	0.85734
3	0.79383
4	0.73503
5	0.68058
6	0.63017
7	0.58349
8	0.54027
9	0.50025
10	0.46319