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

ID: 2543649 • Letter: E

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 $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Machine A could be purchased for $57,000. It will last 10 years with annual maintenance costs of $1,800 per year. After 10 years the machine can be sold for $5,985.

Machine B could be purchased for $47,500. It also will last 10 years and will require maintenance costs of $7,200 in year three, $9,000 in year six, and $10,800 in year eight. After 10 years, the machine will have no salvage value.

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.)

Explanation / Answer

Machine A year 0 year 1-9 year 10 cost of machine -57,000 maintenance cost -1,800 -1,800 Salvage value 5,985 total cash outflow -57,000 -1,800 4,185 Discount factor at 8% 1 6.24689 0.46319 Present value -57000 -11244.4 1938.45 Net present value -66,305.95 Machine B year 0 year 3 year 6 year 8 cost of machine -47,500 Maintenance cost -7,200 -9,000 -10,800 total cost -47,500 -7200 -9000 -10800 Discount factor at 8% 1 0.79383 0.63017 0.54027 present value -47500 -5715.58 -5671.53 -5834.92 Net present value -64,722.02 Should purchase Machine B

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

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

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