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12 July, 03:38

company must decide whether to buy Machine A or Machine B. After 5 years Machine A will be replaced with another A. The initial cost for Machine A is $12,500, annual maintenance is $1,000, and the salvage value at 5 years is $10,000. Machine B has an initial cost of $20,000, 0 maintenance costs, and a salvage value of $10,000 at 10 years. Which machine should be purchased? Use a MARR of 10%. on financial calculator

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  1. 12 July, 04:57
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    Answer: The present value of the Machine B ($16140) is less than that of Machine A ($16338), so we should purchase Machine B.

    Explanation:

    Present value of the cost incurred on Machine A:

    Given:

    Initial capital cost = $12500

    Capital cost at 6th year ($12500 - salvage of previous machine $10000) = $2500

    Present value of capital cost at (10%,5) = $1553

    Maintenance cost = $1000

    Present value of Maintenance cost at (10%,10) = $6145

    Less: Salvage at the end of Year 10 = $10000

    Present value of Salvage cost at (10%,10) = $3860

    Total present value of cost in Machine A = $16338

    Similarly,

    Present value of the cost incurred on Machine B:

    Given:

    Initial capital cost = $20000

    Maintenance cost = $0

    Present value of Maintenance cost at (10%,10) = $0

    Less: Salvage at the end of Year 10 = $10000

    Present value of Salvage cost at (10%,10) = $3860

    Total present value of cost in Machine B = $16140

    As the present value of the Machine B ($16140) is less than that of Machine A ($16338), so we should purchase Machine B.
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