Question

Three alternatives Machines have the following cost data associated with them. Machine Z Data Machine X Machine Y Useful Life, Years 10 10 10 $1,325,000 $1,980,000 $1,650,000 First Cost $265,000 $589,000 $435,000 Annual Benefit $95,000 $97,000 $91,000 Annual M&O Costs Annual additional M&O $2,300 $1,980 $2,100 cost in Gradient Salvage Value $205,000 $178,000 $145,000 Loan Payment $187,971 $150,946 $225,565 The loan payments are calculated using an interest rate of 10%, a life equal to the life of the machine, and a down payment of 30%. Use a MARR of 12% and determine which machine, if any, should be purchased. Use incremental analysis

Answer 1

Machine X

Items	Cash Flow	P.V	Comments
First Cost	-1325000
Down Payment	-397500	-397500	30% of First Cost
Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient	167700	947505	P.V=Cash Flow*Annuity Factor(10 years and 12%)
Loan Payment	-150946	-852844.9	P.V=Loan Payment*Annuity Factor(10 years and 12%)
Slavage Value	145000	46686.1	P.V=Salvage Value/1.12^10
Net Present Value		-256153.7807

Machine Y
Items	Cash Flow	P.V	Comments
First Cost	-1980000
Down Payment	-594000	-594000	30% of First Cost
Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient	489900	2767935	P.V=Cash Flow*Annuity Factor(10 years and 12%)
Loan Payment	-225565	-1274442.25	P.V=Loan Payment*Annuity Factor(10 years and 12%)
Salvage Value	205000	66004.5	P.V=Salvage Value/1.12^10
Net Present Value		965497.2635

Machine Z
Items	Cash Flow	P.V	Comments
First Cost	-1650000
Down Payment	-495000	-495000	30% of First Cost
Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient	342020	1932413	P.V=Cash Flow*Annuity Factor(10 years and 12%)
Loan Payment	-187971	-1062036.15	P.V=Loan Payment*Annuity Factor(10 years and 12%)
Salvage Value	178000	57311.2	P.V=Salvage Value/1.12^10
Net Present Value		432688.0861

From Above machine y has highest NPV ($965497) thus machine y should be purchased