Question

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

Answer 1

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.