Machine A Machine B Type of Equipment General purposes Installed Cost $8,000 $13

Question

Machine A Machine B
Type of Equipment General purposes
Installed Cost $8,000 $13,000
Salvage Value 800 3,000
Annual Labor Cost 6,000 3,600
Estimated Life (yrs) 10 5

In adding a new product line, a firm needs a new piece of machinery. An investigator of suitable equipment for the production process has narrowed the choice to the two machines listed.
Assume that at the end of five years, a comparable replacement for Machine B will be available. Using present-value analysis with a 10 percent interest rate, which machine would you choose?

Explanation / Answer

i=0.1

after 5 yrs
machine A
net present value=8000+6000[(1+(1+i)+(1+i)2+(1+i)3+(1+i)4)]/(1+i)5

                         =8000+6000(6.105/1.6105)=8000+1582.82=$9582.82

machine B
net present value=13000+3600[(1+(1+i)+(1+i)2+(1+i)3+(1+i)4)]/(1+i)5 -3000/(1+i)5

                         =13000+3600(6.105/1.6105)=13000+949.69-1862.77=$12086.92

so in any way , using machine A is only suitable.

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