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. EVA of $1. PVA of $1. EVAD of S1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $36,000. It will last 10 years with annual maintenance costs of $1200 per year. After 10 years the machine can be sold for $3,780. Machine B could be purchased for $30,000. It also will last 10 years and will require maintenance costs of $4,800 in year three $6,000 in year six, and $7,200 in year eight. After 10 years, the machine will have no salvage value. Required: 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. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase? (Negative amounts should be Indicated by a minus sign. Do not round Intermediate calculations. Round your final answers to nearest whole dollar amount.) Machine A Machine B Esquire should purchase

Answer 1

Net Present Value is used find whether the project is a good option or not. To do so it uses present value of all the cash flows.

Calculation of Net Present Value of machine :

Machine A
Present value of cost of machine		$36,000
Annual Cost	$1,200*6.7100814( PVAF(8%,10))	$8,052.10
Salvage Value	$3,780*0.4631935( PVF(8%,10))	-$1,750.87
Net Present Value		$42,301.23

Net Present Value of Machine A is $42,301(rounded off)

Machine B
Present value of cost of the machine		$30,000
Annual Cost	$4,800*(1.08^-3)	$3,810.38
	$6,000*(1.08^-6)	$3,781.02
	$7,200*(1.08^-8)	$3,889.94
Net Present Value		$41,481.34

Net Present Value of Machine B is $41,481(rounded off)

Since machine B has lower net present value of cash outflows , machine B is preferable