Machine A was purchased last year for $20,000 and had an estimated MV of $2,000

Question

Machine A was purchased last year for $20,000 and had an estimated MV of $2,000 at the end of its six-year life. Annual operating costs are $2,000. The machine will perform satisfactorily over the next five years. A salesman for another company is offering a replacement, Machine B, for $14,000, with an MV of $1,400 after five years. Annual operating costs for Machine B will only be $1,400. A trade-in allowance of $10,400 has been offered for Machine A. If the before- tax MARR is 12% per year, how much is the defender Present Worth?

Note: Consider negative sign, if any, when entering the result.

Explanation / Answer

Machine A - defender

PWA = -$10,400 - $2,000(P/A,12%, 5) + $2,000(P/F,12%,5)

          = -$16,475

Machine B- challenger

PWV = -414,000 - $1,400 (P/A,12%,5) + $10,400(P/F, 12%, 5) = -$18,252

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