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 $35,750. It will last 10 years with annual maintenance costs of $1,300 per year. After 10 years the machine can be sold for $3,575. Machine B could be purchased for $32,500. It also will last 10 years and will require maintenance costs of $5,200 in year three, $6,500 in year six, and $7,800 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.

Answer 1

Out intention is to find low cost machine. We wilp do this by finding out their present value cost.

Machinery 1

Present Value Costs

= Initial cost + Maintenance cost x PVIFA(8%, 10 years) - Salvage value x PVIF(8%, 10)

= $35,750 + $1,300 x 6.71008 - $3,575 x 0.46319

= $42,817 (rounded off)

Machinery 2

Present value cost

= Initial Cost + Maintenance cost x PVIF(8%,3) + Maintenance cost x PVIF(8%,6) + Maintenance cost x PVIF(8%,8)

= $32,500 + $5,200 x 0.79383 + $6,500 x 0.63017 + $7,800 x 0.54027

= $44,938 (rounded off)

Since, the Present value of ourflow ia low under Machine A, it is preferred.

The final amounts may slightly differ due to rounding of factors & amounts.

Note :

PVIFA = Present value Interest factor Annuity

PVIF = Present value interest factor

Since tables are not given in thia question, values are taken from tables available online. It will be one and the same.