David is so busy cleaning his office he has asked you to help with the work. Det

ID: 2571689 • Letter: D

Question

David is so busy cleaning his office he has asked you to help with the work. Determine which equipment should be purchased, given an interest rate of 8%.

Mess Away Quick Clean

First cost $65,000 $78,000

Annual Savingss 20,000 24,000

Annual operating costs 4,000 2,750

Scheduled Maintenance $1,500 at the end of 3rd year $,3000 at the end of 3rd year

Annual insurance* 2,000 2,200

Salvage value 10% of first cost 12.5 % of first cost

Useful life 5 years 5years

* Assume beginning -of-period payments

Explanation / Answer

Particulars

Mess Away

Quick Clean

First cost (A)

65000

78000

Annual net cash inflows excluding Maintenance and Insurance

20000-4000 = 16000

24000-2750 = 21250

Salvage Value

65000*10% =6500

78000*12.5% = 9750

Present value of Annual net cash inflows excluding Maintenance and Insurance (B)

16000*PVAF(8%,5) = 16000*3.9927 = 63883.20

21250*PVAF(8%,5) = 21250*3.9927 = 84844.87

Present Value of Maintenance cost (C

1500*PVIF(8%,3) = 1500*0.7938 = 1190.70

3000*PVIF(8%,3) = 3000*0.7938 = 2381.40

Present Value of Annual Insurance (D)

2000 + 2000* PVAF(8%,3) = 2000 + 2000*2.577 = 2000 + 5154 = 7154

2200 + 2200* PVAF(8%,3) = 2200 + 2200*2.577 = 2200 + 5669.40 = 7869.40

Present Value of Salvage value (E)

6500*PVIF(8%,5) = 6500*0.6805 = 4423.25

9750*PVIF(8%,5) = 9750*0.6805 = 6634.87

Net Present Value (B + E – A – C –D)

-5038.25

3228.94

Equipment Quick clean should be purchased as it has positive NPV.