Problem 6-8 Ellison Inc., a manufacturer of steel school lockers, plans to purch

Question

Problem 6-8 Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,230 per year for the first 5 years, $2,140 per year for the next 10 years, and $2,950 per year for the last 5 years. Following is each vendor’s sale package. Vendor A: $55,730 cash at time of delivery and 10 year-end payments of $18,460 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $11,950. Vendor B: Forty semiannual payments of $9,910 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge. Vendor C: Full cash price of $143,080 will be due upon delivery. Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following: (Use the tables below.) The present value of the cash flows for vendor A. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is $ The present value of the cash flows for vendor B. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is $ The present value of the cash flows for vendor C. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) The present value of the cash outflows for this option is $ From which vendor should the press be purchased? The press should be purchased from Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

calculation of present outflows of vendor A= total cash ouflow at the time of delivery =-$ 55,730

present value of total 10 year end-payments value =-$ 18,460*6.145 ( annuity factor for 10 years @10%)

= -$ 113436.7

total initial cost for annual maintanence =-$ 11,950

total present value of cahflow for vendor A = -$ 55,730-$ 113436.7-$ 11,950

=-$ 181,117

calcultion of present value of cash outflowsof vendor b =-$ 9,910*17,159 ( 40 periods annuity value @5%)

= -$ 170,047

calculation of present value of cash outflows of vendor c= -$ 143,080-$ 1,230*3.791(annuity factor of first 5 years @ 10%)- $ 2,140*3.815( annuity factor of middle 10 years @ 10%)-$ 2,950* 0.9076(last 5 years annuity factor @ 10%) = -$ 143,080 -$ 4,663-$ 8,164 - $ 2,677

= -$ 158,584

so thesee three vendors option c is best

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