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Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $36,000. It will last 10 years with annual maintenance costs of $1,200 per year. After 10 years the machine can be sold for $3,780. Machine B could be purchased for $30,000. It also will last 10 years and will require maintenance costs of $4,800 in year three, $6,000 in year six, and $7,200 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) Machine A Machine B Esquire should purchase PV +

Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Machine A could be purchased for $36,000. It will last 10 years with annual maintenance costs of $1,200 per year. After 10 years the machine can be sold for $3,780. Machine B could be purchased for $30,000. It also will last 10 years and will require maintenance costs of $4,800 in year three, $6,000 in year six, and $7,200 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) Machine A Machine B Esquire should purchase PV +

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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### Understanding Present Value Calculation for Investment Decisions #### Context: Esquire Company needs to acquire a molding machine to be used in its manufacturing process. The company has determined the following factors: - FV of $1 - PV of $1 - FVA of $1 - PVA of $1 - FVAD of $1 - PVAD of $1 (Please use appropriate factors from the tables provided). #### Details of the Machines: **Machine A:** - Purchase Cost: $36,000 - Lifespan: 10 years - Annual Maintenance Costs: $1,200 per year - Salvage Value after 10 years: $3,780 **Machine B:** - Purchase Cost: $30,000 - Lifespan: 10 years - Maintenance Costs: - $4,800 in Year 3 - $6,000 in Year 6 - $7,200 in Year 8 - Salvage Value after 10 years: None #### Required Calculation: Assume an interest rate of 8% accurately reflects the time value of money in this situation, and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A and Machine B to determine which machine Esquire should purchase. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. #### Decision Making Table: | Machine | PV | |-----------------|----------| | Machine A | | | Machine B | | | Esquire should purchase | | By calculating the present value (PV) of each machine, one can ascertain the most economically feasible machine for Esquire Company to invest in. This decision-making process considers the initial purchase price, ongoing maintenance costs, and any end-of-lifespan salvage value, all adjusted for the time value of money using the specified interest rate. This approach ensures that the company derives the maximum value from its investment, optimizing operational and maintenance expenses over the machine's useful life.
Transcribed Image Text:### Understanding Present Value Calculation for Investment Decisions #### Context: Esquire Company needs to acquire a molding machine to be used in its manufacturing process. The company has determined the following factors: - FV of $1 - PV of $1 - FVA of $1 - PVA of $1 - FVAD of $1 - PVAD of $1 (Please use appropriate factors from the tables provided). #### Details of the Machines: **Machine A:** - Purchase Cost: $36,000 - Lifespan: 10 years - Annual Maintenance Costs: $1,200 per year - Salvage Value after 10 years: $3,780 **Machine B:** - Purchase Cost: $30,000 - Lifespan: 10 years - Maintenance Costs: - $4,800 in Year 3 - $6,000 in Year 6 - $7,200 in Year 8 - Salvage Value after 10 years: None #### Required Calculation: Assume an interest rate of 8% accurately reflects the time value of money in this situation, and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A and Machine B to determine which machine Esquire should purchase. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. #### Decision Making Table: | Machine | PV | |-----------------|----------| | Machine A | | | Machine B | | | Esquire should purchase | | By calculating the present value (PV) of each machine, one can ascertain the most economically feasible machine for Esquire Company to invest in. This decision-making process considers the initial purchase price, ongoing maintenance costs, and any end-of-lifespan salvage value, all adjusted for the time value of money using the specified interest rate. This approach ensures that the company derives the maximum value from its investment, optimizing operational and maintenance expenses over the machine's useful life.
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