Vita International (VT) intends to purchase equipment. To get the best price, VT

Question

Vita International (VT) intends to purchase equipment. To get the best price, VT asked for bids from vendors. Analysis shows that each equipment from the vendors is similar and has estimated useful life of 20 years.

Additionally, each equipment will have year-end maintenance costs as follows:

year 1-5 Year6-15 Year 16-20

Cost per year $1,000 $2,000 $3,000

Below are the packages of three vendors:

Vendor 1: VT pays $55,000 cash at time of delivery and payments of $18,000 at end of each of the next 10 years. DT can elect to purchase a 20-year maintenance service agreement for $10,000 one-time fee. The purchase agreement is optional but if purchased, VT won’t have to maintain the equipment for a fee for the useful life of the equipment. (Use PV of ordinary annuity table)

Vendor 2: Sales price is $380,000. Payment of $9,500 is payable semi-annually for 20 years. Upon delivery, VT pays $9,500. Then, it makes remaining 39 payments starting 6 months after delivery. The annual maintenance for the next 20 years is included in the price. (Use PV of annuity due; remember the payment is twice a year, so interest rate will be half of annual interest rate provided below).

Vendor 3: Sales price is $150,000. VT must pay the whole sales price at delivery. (Use PV of ordinary annuity table but take into consideration the years of the maintenance cost).

Required Assume VT will pay for the maintenance contract with vendor 1 if selected and that vendor 2 will perform maintenance at no extra charge as indicated. Since Vendor 3 doesn’t offer maintenance, VT will pay for this based on the year-end maintenance cost provided. Which vendor should DT select if its cost of funds is 10%? (Hint: calculate which one has the lowest PV of cash outflows).

Explanation / Answer

Table of Pv Factors & Annuity factor at 10% Year PV Factors at 10 % Annuity Factor 1 0.9091 0.9091 2 0.8264 1.7355 3 0.7513 2.4869 4 0.6830 3.1699 5 0.6209 3.7908 6 0.5645 4.3553 7 0.5132 4.8684 8 0.4665 5.3349 9 0.4241 5.7590 10 0.3855 6.1446 11 0.3505 6.4951 12 0.3186 6.8137 13 0.2897 7.1034 14 0.2633 7.3667 15 0.2394 7.6061 16 0.2176 7.8237 17 0.1978 8.0216 18 0.1799 8.2014 19 0.1635 8.3649 20 0.1486 8.5136 Now we will evaluate cases of each vendor Vendor 1 Amount Annuity Factor Present Value of cash outflow Outflow at year 0 Cash at time of delivery 55000 1 55000 One time Fee 10000 1 10000 Outflow year (1 - 10) 18000 6.1446 110602.80 Present Value of Outflow 175602.80 Vendor 2 Amount Annuity Factor Present Value of cash outflow Outflow at year 0 Cash at time of delivery 9500 1 9500 Outflow year (1 - 20) 9500 17.0170 161661.5 Present Value of Outflow 171161.5 Annuity Factor for year 1-20 has been calculated at 5% per half year & 39 semmiannual payments Vendor 2 Amount Annuity Factor Present Value of cash outflow Outflow at year 0 Cash at time of delivery 150000 1 150000 Outflow year (1 - 5) 1000 3.7908 3790.8 Outflow year (6 - 15) 2000 3.8153 7630.6 Outflow year (16 - 20) 3000 0.9075 2722.5 Present Value of Outflow 164143.9 Annuity factor for year 6- 15 has been calculated by adding Pv Factors for year 6 - 15 Annuity factor for year 16- 20 has been calculated by adding Pv Factors for year 16 - 20 Accordingly offer from Vendor 3 should be accepted as it has lowest Present value of outflow

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.