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 |

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