Basic Interest and Present/Future Worth Problem 4 (15 points) One of two machine

Question

Basic Interest and Present/Future Worth

Problem 4 (15 points)

One of two machine tools has to be chosen.

The first machine, the Super Cutter, initially costs $75,000, needs to be maintained every 2 years at a cost of $3000, and has a scrap value of $15,000.

The second machine, the Miracle Mill, initially costs $60,000, needs to be maintained every 4 years at a cost of $8000, and has a scrap value of $12,000.

The profit associated with the Super Cutter is $8,000/year, and the profit associated with the Miracle Mill is $7,000/year.

Both have a life of 8 years, and the interest rate is 4%.

Explanation / Answer

time period = 8 years, interest rate = 4%

Super cutter:

PW = -75000 + (8000/1.04 + 8000/1.042 +... + 8000/1.048) - (3000/1.042 + ... + 3000/1.046 )+15000/1.048

PW = - $17886.7

Miracle Mill:

PW = -60000 + (7000/1.04 + 7000/1.042 +... + 7000/1.048) - 8000/1.044 +12000/1.048

PW = - $10940.94

Mircale Mill has a lower cost and must therefore be chosen.

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