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 $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $16,500. It will last 10 years with annual maintenance costs of $600 per year. After 10 years the machine can be sold for $1,650. Machine B could be purchased for $15,000. It also will last 10 years and will require maintenance costs of $2,400 in year three, $3,000 in year six, and $3,600 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. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?

	PV
Machine A
Machine B
Esquire should purchase

Answer 1

1. Computation of NPV of Machine -A
	Now	1	2	3	4	5	6	7	8	9	10
Initial Cost	-$16,500
Annual operating costs		-$600	-$600	-$600	-$600	-$600	-$600	-$600	-$600	-$600	-$600
Salvage value (old)											$1,650
Total Cash Flow	-$16,500	-$600	-$600	-$600	-$600	-$600	-$600	-$600	-$600	-$600	$1,050
Discount facr 8%	1.000	0.926	0.857	0.794	0.735	0.681	0.630	0.583	0.540	0.500	0.463
Present value	-$16,500	-$556	-$514	-$476	-$441	-$408	-$378	-$350	-$324	-$300	$486
Net present value	-$19,762
2
2. Computation of NPV of Machine -B
	Now	1	2	3	4	5	6	7	8	9	10
Purchase cost	-$15,000
Annual operating costs				-$2,400			-$3,000		-$3,600
Salvage value (old)
Total Cash Flow	-$15,000			-$2,400			-$3,000		-$3,600
Discount facr 8%	1.000	0.926	0.857	0.794	0.735	0.681	0.630	0.583	0.540	0.500	0.463
Present value	-$15,000			-$1,905			-$1,891		-$1,945
Net present value	-$20,741
Net present value	-$20,741

Esquire should purchase Machine A