Question

Question 1: A company needs to purchase a new machine to produce parts. There are two options.

Alternative A costs $75,000 with a maintenance cost of $2,000 per quarter. The revenue generated from the machine is $2,000 every month. The life of the machine is expected to be 20 years. At the end of twenty years, the machine should be worth no more than 10% of its cost.

Alternative B costs $50,000 with a maintenance cost of $1,000 per quarter. This machine will generate $1,500 in revenue every month. However, the life of the machine is only 10 years. At the end of 10 years, the machine should be worth no more than 8% of its cost.

Create the cash flow for both opportunities. Hint: The alternatives are mutually exclusive and have different lives. How should the cash flow be drawn to find an equal life for both?

Answer 1

	Alternative -1	Alternative -2
Annual Revenue (2000*12), (1500*12)	24000	18000
Annual Maintainance cost ( $2000*4), (1000*4)	8000	4000
Annual Income	16000	14000
Life of macchine	20 Year	10 Yeaar
Total Income earn in life of machineIn	320000	140000
Salvage value of machine( 75000*10%) (50000*8%)	7500	4000
Total Cash inflow fro Machine	327500	144000
No. of Useful life	20 year	10 year
Equaivalent Annual cash flow frrom machine	16375	14400