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)Machine A could be purchased for $48,000. It will last 10 years with annual maintenance costs of $1,000 per year. After 10 years the machine can be sold for $5,000.Machine B could be purchased for $40,000. It also will last 10 years and will require maintenance costs of $4,000 in year three, $5,000 in year six, and $6,000 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. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.)Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?

Answer 1

The decision on which machine to purchase involves calculating the present value of the costs for each, including initial purchase, maintenance, and salvage values at an 8% interest rate. Machine A has a higher purchase price but lower annual maintenance cost and a salvage value. Machine B has a lower initial cost but higher specific maintenance costs and no salvage value.

Step-by-step explanation:

To determine which machine Esquire Company should purchase, we need to calculate the present value (PV) of the costs associated with each machine, including maintenance and salvage values, discounted at the given interest rate of 8%.

Machine APurchase Price: -$48,000
Annual Maintenance Costs (Annuity): -$1,000 x Present Value Annuity Factor (PVA) for 10 years at 8%
Salvage Value: +$5,000 x Present Value (PV) of $1 at the end of 10 years at 8%

Machine BPurchase Price: -$40,000
Maintenance Costs at Year 3: -$4,000 x PV of $1 in 3 years at 8%
Maintenance Costs at Year 6: -$5,000 x PV of $1 in 6 years at 8%
Maintenance Costs at Year 8: -$6,000 x PV of $1 in 8 years at 8%
No Salvage ValueAfter calculating the PV for both machines, Esquire Company should choose the machine with the lowest present value of costs, indicating the more cost-effective option over the 10-year period.

Answer 2

Answer: Machine B because it has the lower Present Value

Explanation:

Machine A

= Present Value of income - Present Value of Costs

Present value of Income;

Sold for $5,000 after 10 years.

= 5,000/ (1 + 8%)^10

= $2,315.97

Present Value of Costs;

Purchased for $48,000.

Maintenance of $1,000 per year for years.

Present value of maintenance= 1,000 * Present value factor of annuity, 10 years, 8%

= 1,000 * 6.7101

= $6,710.10

Machine A Present Value

= 2,315.97 - 6,710.10 - 48,000

= ‭-$52,394

Machine B

No salvage value.

Present Value of costs

Purchased for $40,000.

Present value of maintenance = (4,000 / (1 + 8%)^3) + (5,000 / ( 1 + 8)^6) + (6,000 / ( 1 + 8%)^8)

= -$9,567.79

Present Value = -40,000 - 9,567.79

= -$49,568