Question

Please show all work with equations. No excel please! Thanks!

QZY Inc. is evaluating new widget machines offered by three companies.

MARR = 15%. From which company, if any, should you buy the widget machine? Use rate of return analysis.

	Company A	Company B	Company C
First Cost, $	15,000	25,000	20,000
Maintenance & Operating Costs, $	1,600	400	900
Annual Benefit, $	8,000	13,000	9,000
Salvage Value, $	3,000	6,000	4,500
Useful Life, in years	3	3	3

Answer 1

Solution:-

You need to calculate the NPV to take the decision

NPV

Machine A = -15000 + (8000-1600)/(1+.15)^1 + (8000-1600)/(1+.15)^2 + (8000-1600)/(1+.15)^3 + 3000/(1+.15)^3 = 1584.19

Machine B = -25000 + (3000-400)/(1+.15)^1 + (3000-400)/(1+.15)^2 + (3000-400)/(1+.15)^3 + 6000/(1+.15)^3 = -15118.52

Machine C = -20000 + (9000-900)/(1+.15)^1 + (9000-900)/(1+.15)^2 + (9000-900)/(1+.15)^3 + 4500/(1+.15)^3 = 10233.25

Based on the above calculations, you should buy from Company C as it offers the highest NPV.

(Company C) is the correct answer.