Machine A was purchased last year for $20,000 and had an estimated MV of $2,000

Question

Machine A was purchased last year for $20,000 and had an estimated MV of $2,000 at the end of its six-year life. Annual operating costs are $2,000. The machine will perform satisfactorily over the next five years. A salesman for another company is offering a replacement, Machine B, for $14,000, with an MV of $1,400 after five years. Annual operating costs for Machine B will only be $1,400. A trade-in allowance of $10,400 has been offered for Machine A. If the before- tax MARR is 12% per year, which machine should you choose for your company?

Explanation / Answer

A Year Cash Flow PV factor@12% PV of cash Inflows 0 20000 1 -20000 1 8400 0.988 8300.40 2 8400 0.976 8201.97 3 8400 0.965 8104.72 4 8400 0.953 8008.61 5 8400 0.942 7913.65 5 2000 0.942 1884.20 NPV 22413.54 B Year Cash Flow PV factor@12% PV of cash Inflows 0 14000 1 -14000 1 1400 0.988 -1383.40 2 1400 0.976 -1367.00 3 1400 0.965 -1350.79 4 1400 0.953 -1334.77 5 1400 0.942 -1318.94 5 1400 0.942 1318.94 NPV -19435.95 Machinery A is to be choosen

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