Esquire Company needs to acquire a molding machine to be used in manufacturing p

Question

Esquire Company needs to acquire a molding machine to be used in manufacturing process. Two types of machines that wouid be appropriate are presently on the market. The company has determined the following (Use appropriate factors from the tables provided . Machine A could be purchased for S16.500. It wil last 10 years with annual maintenance costs of S600 per year . After 10years machine can be sold for $1,650. Machine B could be purchased for $15.000, it also last 10 years and will require maintenance costs of $2.400 in year three, $3000 in year six, and $3.600 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% property reflects the time value of money in this Situation and that maintenance costs are paid at the tax considerations (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. which machine Esquire should purchase?

Explanation / Answer

Answer)

Calculation of NPV:

Initial investment+Maintainance costs at discounted rate-salvage value at discount rate

For Machine A:

$16500+$600[(1/1.08)+(1/(1.08)^2)+(1/1.08^3)+(1/1.08^4)+(1/1.08^5)+(1/1.08^6)+1/1.08^7)+(1/1.08^8)+(1/1.08^9)+(1/1.08^10)]-$1650(1/1.08^10)

=$19761.78

For Machine B:

$15000+($2400×(1/1.08^3))+($3000×(1/1.08^6))+($3600×(1/1.08^8))-$0

=$20740.67

Hence, it is better to buy Machine A as it have low NPV cost.

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