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 $48,000. It will last 10 years with annual maintenance costs of $1,000 per year. After 10 years the machine can be sold for $5,000.

Machine B could be purchased for $40,000. It also will last 10 years and will require maintenance costs of $4,000 in year three, $5,000 in year six, and $6,000 in year eight. After 10 years, the machine will have no salvage value.

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.

1. Calculate the present value of Machine A & Machine B.
2. Which machine Esquire should purchase? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Explain your response.
3. Could the company use any other method(s) to determine the best machine to purchase? Explain your answer.

Answer 1

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	-$48,000	1	-$48,000
Annual maintenance cost	1-10	-$1,000	6.71008	-$6,710
Salavage value	10	$5,000	0.46319	$2,316
Present value of machine A				-$52,394
Machine B
Purchase Cost	0	-$40,000	1	-$40,000
Maintenance cost - Year 3	3	-$4,000	0.79383	-$3,175
Maintenance cost - Year 6	6	-$5,000	0.63017	-$3,151
Maintenance cost - Year 8	8	-$6,000	0.54027	-$3,242
Present value of machine B				-$49,568

Esquire should purchase machine B as it is having higher net present value.