Esquire Company needs to acquire a molding machine to be used in its manufacturi
ID: 2567790 • 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 $33,000. It will last 10 years with annual maintenance costs of $1,100 per year. After 10 years the machine can be sold for $3,465.
Machine B could be purchased for $27,500. It also will last 10 years and will require maintenance costs of $4,400 in year three, $5,500 in year six, and $6,600 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. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.)
Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?
PV
MAchine A $__________
MAchine B$ __________
Explanation / Answer
Solution:
The machine having less Present Value of Cash Outflow should be purchased.
Machine A -- Present Value of Cash Outflow
Year
Cash Flow
PV factor @ 8%
Present Value
(a)
(b)
(a*b)
0
Cost of Machine
$33,000
1.000
$33,000
1
Annual maintenance costs
$1,100
0.926
$1,019
2
Annual maintenance costs
$1,100
0.857
$943
3
Annual maintenance costs
$1,100
0.794
$873
4
Annual maintenance costs
$1,100
0.735
$809
5
Annual maintenance costs
$1,100
0.681
$749
6
Annual maintenance costs
$1,100
0.630
$693
7
Annual maintenance costs
$1,100
0.583
$642
8
Annual maintenance costs
$1,100
0.540
$594
9
Annual maintenance costs
$1,100
0.500
$550
10
Annual maintenance costs
$1,100
0.463
$510
10
Salvage Value
-$3,465
0.463
-$1,605
Present Value of Cash Outflow
$38,776
Note – Cash Outflows are shown in positive number and Cash Inflow like Salvage Value is shown in negative number.
Machine B -- Present Value of Cash Outflow
Year
Cash Flow
PV factor @ 8%
Present Value
(a)
(b)
(a*b)
0
Cost of Machine
$27,500
1.000
$27,500
1
0.926
$0
2
0.857
$0
3
Maintenance costs
$4,400
0.794
$3,493
4
0.735
$0
5
0.681
$0
6
Maintenance costs
$5,500
0.630
$3,466
7
0.583
$0
8
Maintenance costs
$6,600
0.540
$3,566
9
0.500
$0
10
Salvage Value
$0
0.463
$0
Present Value of Cash Outflow
$38,025
Hence,
PV of Cash Outflow of Machine A = $38,776
PV of Cash Outflow of Machine B = $38,025
Machine B is cheaper than Machine A, hence Machine B should be purchased
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Year
Cash Flow
PV factor @ 8%
Present Value
(a)
(b)
(a*b)
0
Cost of Machine
$33,000
1.000
$33,000
1
Annual maintenance costs
$1,100
0.926
$1,019
2
Annual maintenance costs
$1,100
0.857
$943
3
Annual maintenance costs
$1,100
0.794
$873
4
Annual maintenance costs
$1,100
0.735
$809
5
Annual maintenance costs
$1,100
0.681
$749
6
Annual maintenance costs
$1,100
0.630
$693
7
Annual maintenance costs
$1,100
0.583
$642
8
Annual maintenance costs
$1,100
0.540
$594
9
Annual maintenance costs
$1,100
0.500
$550
10
Annual maintenance costs
$1,100
0.463
$510
10
Salvage Value
-$3,465
0.463
-$1,605
Present Value of Cash Outflow
$38,776
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