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 $27,000. It will last 10 years with annual maintenance costs of $900 per year. After 10 years the machine can be sold for $2,835. Machine B could be purchased for $22,500. It also will last 10 years and will require maintenance costs of $3,600 in year three, $4,500 in year six, and $5,400 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. Calculate the present value of Machine A

Answer 1

Esquire Company

The present value of Machine A is:

= $31,726.

Step-by-step explanation:

a) Data and Calculations:

Machine A Machine B

Purchase costs $27,000 $22,500

Useful life 10 years 10 years

Salvage value $2,835 $0

Maintenance costs:

Annual $900 per year

Year 3 $3,600

Year 6 $4,500

Year 8 $5,400

Interest rate 8% 8%

Present value of Machine A:

Initial costs = $27,000

Annual maintenance costs:

$900 * 6.710 = $6,039

Salvage value = $2,835 * 0.463 = ($1,313)

Present value of Machine A = $31,726