6) You can choose between two purchases: Machine A or Machine B. Machine A costs

Question

6) You can choose between two purchases: Machine A or Machine B. Machine A costs $25,000 and has a salvage value of $12,000 after 3 years. Machine B costs $30,000 and has a salvage value of $16,000 after 4 years. You can lease a Machine B equivalent for S6,000 per year, if you initially purchased Machine B. You need a machine for a total of 6 years, and can purchase a new machine in the future at the same price with the same salvage value. Ifi is 9% annual rate compounded annually, which machine should be purchased? Show work and justify answer. Answer

Explanation / Answer

Machine-A Year Cashflows PVF @ 9% Present Value 0 -25000 1 -25000 1 0 0.917431 0 2 0 0.84168 0 3 -13000 0.772183 -10038.4 4 0 0.708425 0 5 0 0.649931 0 6 12000 0.596267 7155.208 Present worth -27883 Machine-B Year Cashflows PVF @ 9% Present Value 0 -30000 1 -30000 1 0 0.917431 0 2 0 0.84168 0 3 0 0.772183 0 4 -14000 0.708425 -9917.95 5 0 0.649931 0 6 0 0.596267 0 7 6000 0.547034 3282.205 8 22000 0.501866 11041.06 Present Worth -25595 Machine-B shall be selected

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