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 $36,000. It will last 10 years with annual maintenance costs of $1,200 per year. After 10 years the machine can be sold for $3,780. Machine B could be purchased for $30,000. It also will last 10 years and will require maintenance costs of $4,800 in year three, $6,000 in year six, and $7,200 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. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?

Answer 1

Solution:

Compuation of PV of cash outflows - Esquire Company
Particulars	Period	PV Factor	Machine A
			Amount	Present value
Cash Outflows:
Initial Cost	0	1	$36,000	$36,000
Annual maintenance cost - Machine A	1-10	6.710081	$1,200	$8,052
Salvage Value	10	0.463193	-$3,780	-$1,751
Present value of cash outflows (A)				$42,301

Compuation of PV of cash outflows - Esquire Company
Particulars	Period	PV Factor	Machine B
			Amount	Present value
Cash Outflows:
Initial Cost	0	1	$30,000	$30,000
Maintenance cost:
Year 3	3	0.793832	$4,800	$3,810
Year 6	6	0.63017	$6,000	$3,781
Year 8	8	0.540269	$7,200	$3,890
Present value of cash outflows (A)				$41,481

Present value of cash outflows of machine B is lower than Present value of cash outflows for Machine A. Therefore Esquire should purchase machine B.