Your company needs a machine for the next 20 years. You are considering two diff

Question

Your company needs a machine for the next 20 years. You are considering two different machines.
Machine A
Installation cost ($): 1,000,000
Annual O&M costs ($): 99,000
Service life (years): 20
Salvage value ($): 62,000
Annual income taxes ($): 46,000
Machine B
Installation cost ($): 0,500,000
Annual O&M costs ($): 99,000
Service life (years): 10
Salvage value ($): 54,000
Annual income taxes ($): 39,000
If your company s MARR is 18%, determine which machine you should buy. Assume that machine B will be available in the future at the same costs. Enter the Annual Equivalent Cost as a positive number of the preferred machine.

Explanation / Answer

Computation of Net Present Value for both the Machines are attached as above. Just to brief, Installation cost is put on Zero period as it shall happen now only. And for next 20 years cost of annual O&M and cost of annual income tax has been taken as cash outflow which has been multiplicated by present value factor for that year considering MARR of 18%. Further for Machine B, as the machine will have a life of 10 years, the same process of installation etc has been followed in 11 th year for it.

Cost for Machine B is lesser and hence recommended for buying.

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 NPV A 1000000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 145000 83000 PVF 1 0.847458 0.718184 0.608631 0.515789 0.437109 0.370432 0.313925 0.266038 0.225456 0.191064 0.161919 0.13722 0.116288 0.098549 0.083516 0.070776 0.05998 0.05083 0.043077 0.036506 PV -1000000 -122881 -104137 -88251.5 -74789.4 -63380.8 -53712.6 -45519.1 -38575.5 -32691.1 -27704.3 -23478.3 -19896.8 -16861.7 -14289.6 -12109.8 -10262.6 -8697.09 -7370.41 -6246.11 -3029.97 -1773885

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.