Question

Your company is interested in purchasing a new mini 3D printer to use for product demonstrations. You've identified three suitable alternatives, each with different maintenance and periodic upgrade costs. If you select "Model A" it will cost $5,500 to purchase the printer and will require a one time upgrade in year 3 that will cost $1,500. If you select this model then you expect to receive $2,600 in revenue each year (years 1 through 4). If you select "Model B" it will cost $3,600 to purchase the printer today. This model will require two upgrades, a software upgrade in year 1 which will cost $950 and a hardware upgrade in year 3 which will cost $1,200. However, if you purchase this model it will provide $2,400 in revenue each year (years 1 through 4). Both options will provide four years of productive use. Which of these options (Model A or B) would be the best option for your company to purchase? Assume that MARR = 10%.

Answer 1

Answer:

"Model B" would be the best option for the company to purchase.

Explanation:

To know which model to choose, we compute the Net Present Values (NPV) of the two models and choose the one with the higher positive NPV as follows:

Computation of “Model A” NPV

Year = n    Details              Cash Flow ($)   DF = 1/(1 + 0.1)^n   PV ($)

Year 0     Purchase cost      (5,500)               1.0000                (5,500)

Year 1    Cash inflow             2,600                0.9901                  2,574

Year 2    Cash inflow            2,600                0.9803                 2,549

Year 3    Cash inflow            2,600                0.9706                 2,524

Year 3    Upgrade cost        (1,500)                0.9706                (1,456)

Year 4    Cash inflow            2,600                 0.9610                 2,499

                                                                         "Model A" NPV =  3,189

Computation of “Model B” NPV

Year = n    Details            Cash Flow ($)    DF = 1/ (1 + 0.1)^n   PV ($)

Year 0   Purchase cost           (3,600)             1.0000              (3,600)

Year 1   Cash inflow                  2,400             0.9901                 2,376

Year 1   Software upgrade         (950)            0.9901                   (941)

Year 2   Cash inflow                 2,400             0.9803                2,353

Year 3   Cash inflow                 2,400             0.9706                2,329  

Year 3   Hardware upgrade    (1,200)             0.9706                 (1,165)

Year 4   Cash inflow                 2,400             0.9610                 2,306  

                                                                         "Model B" NPV = 3,659

Therefore, "Model B" should be chosen because its positive NPV of $3,659 is greater than the positive NPV of $3,189 recorded by "Model A".