Question

Hollywood Tabloid needs a new state-of-the-art camera to produce its monthly magazine. The company is looking at two cameras that are both capable of doing the job and has determined the following:  


Camera 1 costs $4,900. It should last for eight years and have annual maintenance costs of $220 per year. After eight years, the magazine can sell the camera for $290.


Camera 2 costs $4,400. It will also last for eight years and have maintenance costs of $790 in year three, $900 in year five, and $1,000 in year seven. After eight years, the camera will have no resale value. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answers to 2 decimal places.)

Required:

1-a. Assume that an interest rate of 8% properly reflects the discount rate in this situation and that maintenance costs are paid at the end of each year. Determine the total cost of cameras.

1-b. Which camera should Hollywood Tabloid purchase?

• Camera 2

• Camera 1

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/spiceland_fin5e/table_4.png

PVA at 1$

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/spiceland_fin5e/table_2.png

PV at 1$

Answer 1

	Camera 1
Year	Cash inflows and outflows	Present value factor @8%	Present value
0	4,900	1	4900
1	220	0.92593	203.7
2	220	0.85734	188.61
3	220	0.79383	174.64
4	220	0.73503	161.71
5	220	0.68058	149.73
6	220	0.63017	138.64
7	220	0.58349	128.37
8	220	0.54027	118.86
8	-290	0.54027	-156.68
		Net Cash outflow / Total cost	6007.58

	Camera 2
Year	Cash inflows and outflows	Present value factor @8%	Present value
0	4,400	1	4400
3	790	0.79383	627.13
5	900	0.68058	612.52
7	1000	0.58349	583.49
		Net Cash outflow / Total cost	6223.14

As cash outflow in camera 1 is less than camera 2, Hollywood tabloid should purchase camera 1.

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