Esquire Company needs to acquire a molding machine to be used in its manufacturi

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. FVA of S1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $48,000. It will last 10 years with annual maintenance costs of $1,000 per year. After 10 years the machine can be sold for $5,000. Machine B could be purchased for $40,000. It also will last 10 years and will require maintenance costs of $4,000 in year three, $5,000 in year six, and $6,000 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. (Negative amounts should be indicated by a minus sign.) Calculate the present value of machine A and machine B PV Machine A Machine B Which machine Esquire should purchase? MachineB Machine A References eBook&Resources

Explanation / Answer

Machine A:

Cost of Machine = $48,000
Annual Maintenance Cost = $1,000
Salvage Value = $5,000
Useful Life = 10 years

NPV = -$48,000 - $1,000 * PVA of $1 (8%, 10) + $5,000 * PV of $1 (8%, 10)
NPV = -$48,000 - $1,000 * 6.71008 + $5,000 * 0.46319
NPV = -$52,394.13

Machine B:

Cost of Machine = $40,000
Maintenance Cost in Year 3 = $4,000
Maintenance Cost in Year 6 = $5,000
Maintenance Cost in Year 8 = $6,000
Salvage Value = $0
Useful Life = 10 years

NPV = -$40,000 - $4,000 * PVA of $1 (8%, 3) - $5,000 * PVA of $1 (8%, 6) - $6,000 * PVA of $1 (8%, 8)
NPV = -$40,000 - $4,000 * 0.79383 - $5,000 * 0.63017 - $6,000 * 0.54027
NPV = -$49,567.79

So, Esquire should purchase Machine B as its NPV is highest.

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