4, A small business is considering the purchase of one of the following computer

Question

4, A small business is considering the purchase of one of the following computers Initial Cost Salvage Value Useful Life Annual Maintenance Computer A $3,900 $1,800 10 years $390 Computer B $5,500 $3,100 10 years $276 (years 1 to 5) $425 (years 6 to 10) 6% Interest Rate 6% a) Which computer should the business purchase? b) What first-cost is necessary for Computer A to Breakeven? c) What salvage value for Computer B will result in Computers A & B being equivalent? d) What is the book value of Computer B in year 4 using straight-line depreciation?

Explanation / Answer

[4.21236*276]+[3.14772*425]

1162.61+ 1337.78

2500.39

PVF6%,10*S

.55839*1800

1005.10

PVF6%,10*S

.55839*3100

1731.02

A)computer B should be purchased as it has lower Total cost than computer A

b)At breake even Total cost of B equals Total cost of A

All factora remaining same ,Initial cost for computer A= Total cost of B-Present value of annual maintenance cost+present value of salvage of A

      = 6269.37- 2870.43+1005.10

           = $ 4404.04 [Approx 4404]

c)for being equivalent .Total cost of A will Total cost of B

Total cost of B=Initial cost+Present value of annual cost-Present value of salvage

6770.43 =5500+2500.39- [PVF6%,10*Salvage]

          = 8000.39 -[.55839*S]

.55839S= 8000.39-6770.43

     S= 1229.96/.55839

         = 2202.69

Salvage of B= $2203 rounded

d)Depreciation for B=[cost-salvage]/useful life

      =[5500-3100]/10= 240 per year

accumuated depreciation for 4 years = 4*240 = 960

Book value =cost-accumulated depreciation

        = 5500-960

         = 4540

A B Initial cost [A] 3900 5500 present value of annual maintenance cost B] PVA6%,10*Annual cost [PVA6%,1-5 *C1]+[PVA6%,6-10*C2] 7.36009*390= $ 2870.43

[4.21236*276]+[3.14772*425]

1162.61+ 1337.78

2500.39

pRESENT VALUE OF SALVAGE [C]

PVF6%,10*S

.55839*1800

1005.10

PVF6%,10*S

.55839*3100

1731.02

total cost [A+B-C] 3900+2870.43-1005.10=6770.43 6269.37

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