Question

Your company is interested in purchasing a new mini 3D printer to use for product demonstrations. You've identified three suitable alternatives, each with different maintenance and periodic upgrade costs. If you select "Model A" it will cost $5,500 to purchase the printer and will require a one time upgrade in year 3 that will cost $1,500. If you select this model then you expect to receive $2,600 in revenue each year (years 1 through 4). If you select "Model B" it will cost $3,600 to purchase the printer today. This model will require two upgrades, a software upgrade in year 1 which will cost $950 and a hardware upgrade in year 3 which will cost $1,200. However, if you purchase this model it will provide $2,400 in revenue each year (years 1 through 4). Both options will provide four years of productive use. Which of these options (Model A or B) would be the best option for your company to purchase? Assume that MARR = 10%.

Answer 1

"Model B" would be the best option for the company to purchase.

Step-by-step explanation:

To know which model to choose, we compute the Net Present Values (NPV) of the two models and choose the one with the higher positive NPV as follows:

Computation of “Model A” NPV

Year = n Details Cash Flow ($) DF = 1/(1 + 0.1)^n PV ($)

Year 0 Purchase cost (5,500) 1.0000 (5,500)

Year 1 Cash inflow 2,600 0.9901 2,574

Year 2 Cash inflow 2,600 0.9803 2,549

Year 3 Cash inflow 2,600 0.9706 2,524

Year 3 Upgrade cost (1,500) 0.9706 (1,456)

Year 4 Cash inflow 2,600 0.9610 2,499

"Model A" NPV = 3,189

Computation of “Model B” NPV

Year = n Details Cash Flow ($) DF = 1/ (1 + 0.1)^n PV ($)

Year 0 Purchase cost (3,600) 1.0000 (3,600)

Year 1 Cash inflow 2,400 0.9901 2,376

Year 1 Software upgrade (950) 0.9901 (941)

Year 2 Cash inflow 2,400 0.9803 2,353

Year 3 Cash inflow 2,400 0.9706 2,329

Year 3 Hardware upgrade (1,200) 0.9706 (1,165)

Year 4 Cash inflow 2,400 0.9610 2,306

"Model B" NPV = 3,659

Therefore, "Model B" should be chosen because its positive NPV of $3,659 is greater than the positive NPV of $3,189 recorded by "Model A".