Question

Machine A costs $15,000 and will last 5 years, at which time the value of the machine is $5,000 (it is worth $7,000 in 4 years). Machine B costs $12,000 and will last 3 years, after which the machine is worth $4,000. You can lease a Machine B (only if you purchased one initially) for $3,000 per year (payment due at end of year). You need a machine for 4 years (required service period), and either machine can be repurchased in the future for the same price. If both machines have the same production speed and capacity. (Interest=10% annually)

What is the difference between the NPV of each machine. Enter this as a POSITIVE number if Machine A is better and a NEGATIVE number of Machine B is better.

Answer 1

Machine-A
Initial Investment				-15000
Less: Present value of Salvage after 4yrs				4781
($ 7000 * PVF at 10% of Year-4 i.e. 0.683)
Net present value of Mmachine-A				-10219
Machine-B:
Initial Investment				-12000
Add: Lease rent for 4th year				-2049
($ 3000 *PVF at 10% for Yr-4 i.e. 0.683)
Less: Present value of Salvage after 4yrs				2732
($ 4000 * PVF at 10% of Year-4 i.e. 0.683)
Net Present value of Machine-B				-11317
Machine-B is better choice