Bison Mfg. is considering two options for purchasing comparable machinery. Machi
ID: 2491867 • Letter: B
Question
Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid up front, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values. Required: Determine which machine should be chosen based on present value considerations.Explanation / Answer
Statement showing the evaluation of two Machines Machines Machine 1 Machine 2 (1)Puchase cost $27,500.00 $25,000.00 (2)Life of Machiene 4 year 4 year (3) Present Value of Running cost of Machine* $4,753.50 $9,123.00 (4) Cash outflow Machine (1)+(3) $32,253.50 $34,123.00 (6)PVIFA 0.10, 4 3.16987 3.16987 (7) Equivalent PV of Annual Cash Outflow (4)/(6) $10,175.02 $10,764.79 Recommendation : Bison Mfg. should buy machine 1 since equivalent annual cash out flow is less than that of machine 2 *Present Value of Runing Cost of Machine Per Year Particular PVF@0.10 Machine 1 Present Value Machine 2 Present Value year 1 0.909 $1,500.00 $1,363.50 $1,000.00 $909.00 year 2 0.826 $1,500.00 $1,239.00 $3,000.00 $2,478.00 year3 0.751 $1,500.00 $1,126.50 $4,000.00 $3,004.00 year4 0.683 $1,500.00 $1,024.50 $4,000.00 $2,732.00 Total $4,753.50 $9,123.00
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