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 $63,000. It will last 10 years
with annual maintenance costs of $2,000 per year. After 10 years
the machine can be sold for $6,615.
Machine B could be purchased for $52,500. It also will last 10
years and will require maintenance costs of $8,000 in year three,
$10,000 in year six, and $12,000 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.
Calculate the present value of Machine A & Machine B. Which
machine Esquire should purchase? (Negative amounts should
be indicated by a minus sign. Do not round intermediate
calculations. Round your final answers to nearest whole dollar
amount.)
PV
Machine A
Machine B
Esquire should purchase?
Solution:
| Computation of Present Value of Machine A and Machine B - Esquire Company | ||||
| Particulars | Period | Amount | PV Factor | Present Value |
| Machine A | ||||
| Purchase Cost | 0 | -$63,000 | 1 | -$63,000 |
| Annual maintenance cost | 1-10 | -$2,000 | 6.71008 | -$13,420 |
| Salavage value | 10 | $6,615 | 0.46319 | $3,064 |
| Present value of machine A | -$73,356 | |||
| Machine B | ||||
| Purchase Cost | 0 | -$52,500 | 1 | -$52,500 |
| Maintenance cost - Year 3 | 3 | -$8,000 | 0.79383 | -$6,351 |
| Maintenance cost - Year 6 | 6 | -$10,000 | 0.63017 | -$6,302 |
| Maintenance cost - Year 8 | 8 | -$12,000 | 0.54027 | -$6,483 |
| Present value of machine B | -$71,636 | |||
Esquire company should purchase Machine B.
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