Two different companies are offering a punch press for sale. Company A charges $

Question

Two different companies are offering a punch press for sale. Company A charges $250,000 to deliver

and install the device. Company A has estimated that the machine will have maintenance and

operating costs of $4000 a year and will provide an annual benefit of $89,000. Company B charges

$205,000 to deliver and install the device. Company B has estimated maintenance and operating

costs of the press at $4300 a year, with an annual benefit of $86,000. Both machines will last 5 years

and can be sold for $15,000 for the scrap metal. Use an interest rate of 12% and a present worth

analysis to determine the machine that the company should buy.

Explanation / Answer

Answer:

The machine that the company should buy is Company B because its NPV is greater than company A.

Company A Particulars Years P.V.F (12%) Amount($) PV ($) Installation cost 0 1 -250000 -250000 Maintenance & Operating cost 1-5 3.604776 -4000 -14419.1 Annual benefit 1-5 3.604776 89000 320825.1 Sale value at the end 5 0.5674268 15000 8511.402 NPV 64917.36

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