BLANK 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 $1,100 per year for the first 5
years, $2,100 per year for the next 10 years, and $3,100 per year
for the last 5 years. Following is each vendor’s sales
package.
Vendor A: $58,420 cash at time of delivery and 10
year-end payments of $17,190 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
$10,230.
Vendor B: Forty semiannual payments of $10,220
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 $150,400 will be due
upon delivery.
Assuming that both Vendors A and B will be able to perform the
required year-end maintenance, that BLANK Inc's cost of funds is
10%, and the machine will be purchased on January 1, compute the
following:
Click here to view factor tables
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?
The press should be purchased
from
which vendor? |
Answer is given below
Vendor C is preferable because of lower present value of cash outflows
BLANK Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for...
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