Question

Taser Company has to purchase some new equipment. Two manufacturers have provided the following information:

	Equipment A	Equipment B
Initial costs	$67,500	$90,000
Estimated life	5 years	5 years
Annual savings	$22,500	$24,000

Because the company requires a present value analysis, the following present value factors are furnished:

Period	Present Value of $1.00 @10%	Present Value of an Annuity of $1.00 @ 10%
1	0.90909	0.90909
2	0.82645	1.73554
3	0.75131	2.48685
4	0.68301	3.16987
5	0.62092	3.79079

Required:

a.   Determine the present value of annual savings for each piece of equipment. Show your calculations clearly.

b. What is the payback for each piece of equipment? Show your calculations clearly.

c.    Which investment is preferable? Why?

Answer 1

a.

	Equipment A	Equipment B
Initial cost	67,500.00	90,000.00
Present value of annual Savings	85,292.78	90,978.96
Net Present Value	17,792.78	978.96

b. Equipment A = 67,500/22,500

=3 Years

Equipment B = 90,000/24,000

=3.75 Years

c. Equipment A investment is Preferable because Net present value is higher than the equipment and payback of equipment A is faster than equipment B