Question

Indigo Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,040 per year for the first 5 years, $2,040 per year for the next 10 years, and $3,040 per year for the last 5 years. Following is each vendor’s sales package.

Vendor A: $57,320 cash at time of delivery and 10 year-end payments of $19,030 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,400.

Vendor B: Forty semiannual payments of $9,920 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge.

Vendor C: Full cash price of $164,700 will be due upon delivery.

Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Indigo’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following:

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The present value of the cash flows for vendor A. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

The present value of the cash flows for vendor B. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

The present value of the cash flows for vendor C. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

From which vendor should the press be purchased?

The press should be purchased from                                                           Vendor CVendor BVendor A

Answer 1

Vendor-A:
Year	Payment for Equipment	Payment for Service Contract	Total Payment	DF Working	Discounting Factor @ 10%	Present Value
0	57,320	10,400	67,720	1	1	67,720.00
1	19,030	-	19,030	1/1.10^1	0.909090909	17,300.00
2	19,030	-	19,030	1/1.10^2	0.826446281	15,727.27
3	19,030	-	19,030	1/1.10^3	0.751314801	14,297.52
4	19,030	-	19,030	1/1.10^4	0.683013455	12,997.75
5	19,030	-	19,030	1/1.10^5	0.620921323	11,816.13
6	19,030	-	19,030	1/1.10^6	0.56447393	10,741.94
7	19,030	-	19,030	1/1.10^7	0.513158118	9,765.40
8	19,030	-	19,030	1/1.10^8	0.46650738	8,877.64
9	19,030	-	19,030	1/1.10^9	0.424097618	8,070.58
10	19,030	-	19,030	1/1.10^10	0.385543289	7,336.89
		Present Value of the Cash Flows for Vendor A:				184,651.11

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Therefore, Present Value of the Cash Flows for Vendor A is $184,651.11

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Alternative Calculation:

Present Value of the Cash Flows for Vendor A = 67,720 + 19,030*PVIFA(10%,10)

= 67,720 + 19,030*6.1446

= 67,720 + 116,931.74

= $184,651.74

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Present Value of the Cash Flows for Vendor B:
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No. of semi-annual periods = 20*2 = 40

Semi-annual Interest rate = 10%/2 = 5%

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Present Value of the Cash Flows for Vendor B= 9,920*PVIFA(5%,40)

= 9,920*17.1591

= $170,218.27

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Therefore, Present Value of the Cash Flows for Vendor B is $170,218.27

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Present Value of the Cash Flows for Vendor B:

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Present Value of the Cash Flows for Vendor B = Full cash price due upon delivery

= $164,700

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.Therefore, Present Value of the Cash Flows for Vendor B is $164,700
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Q) From which vendor should the press be purchased?

Answer) Press should be purchased from Vendor -C since it has the lowest outflow for the company. i.e. $164,700 as compared to the outflows of $184651.11 & $170218.27.