Question

Please compare after 12 years and include cash flow diagram for A and B.

Two machines are being considered for the same task. Machine A costs $18,000 new and is estimated to last 6 years. The cost to replace machine A after 6 years will be $23,000. Machine A will cost $1,200 per year to operate/maintain and it will have a trade-in (salvage) value of $1,500. Machine B costs $38,000 to buy, will last 12 years and will have a trade in value of $2,000. The cost of operation and maintenance for machine B is $700 per year. Compare the two machines on a present worth basis and state which machine will be cheaper and by how much. Include a cash flow diagram for each option. Assume that all interest rates are 8% per year compounded monthly

Answer 1

Machine A will be cheaper by $2772.72 using effective rate of 8.3%

Year	Machine A	Machine B
0	-18000	-38000
1	-1200	-700
2	-1200	-700
3	-1200	-700
4	-1200	-700
5	-1200	-700
6	-22700	-700
7	-1200	-700
8	-1200	-700
9	-1200	-700
10	-1200	-700
11	-1200	-700
12	300	1300
EAR	0.0829995
NPV	-39653.30	-42426.02

Machine A 300 0 1 2. 4 5 6 7 8 10 11 12 -1200 -1200 -1200 -1200 -1200 -1200 -1200 -1200 1200 -1200 -18000 -22700 Machine B 1300 0 1 4 5 6 7 8 9 10 11 2. 3 12. -700 -700 -700 -700 -700 700 -700 -700 -700 -700 -700 -38000

Workings

Book1 Excel AutoSave Sign in Share PComments File Home Insert Formulas Review View Help Tell me what you want to do Draw Page Layout Data Σ 出Insert ▼ Delete Format Calibri A A 10 General Conditional Format as Paste Cell Sort & Find & BI U A- T Formatting Table Styles Filter Select Clipboard Alignment Cells Editing Font Number Styles fox B7 5 A B C D E F G H 1 Year Machine A Machine B 2 -18000 -38000 -1200 1 -700 4 -1200 -700 5 -1200 -700 6 -1200 -700 7 5 -1200 -700 6 =1200-23000+1500 -700 9 7 -1200 -700 10 -1200 -700 -700 11 -1200 12 -700 10 -1200 13 -1200 -1200+1500 (1+8 % /12) ^ 12-1 11 -700 14 12 --700+2000 15 EAR 16 =NPV(C15,C3:C14)+C2 NPV(C15,D3:D14)+D2 NPV 17 Difference C16-D16 18