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: Machine A could be purchased for $11,000. It will last 10 years with annual maintenance costs of $400 per year. After 10 years the machine can be sold for $1,155. Machine B could be purchased for $10,000. It also will last 10 years and will require maintenance costs of $1,600 in year three, $2,000 in year six, and $2,400 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?
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: Machine A could be purchased for $11,000. It will last 10 years with annual maintenance costs of $400 per year. After 10 years the machine can be sold for $1,155. Machine B could be purchased for $10,000. It also will last 10 years and will require maintenance costs of $1,600 in year three, $2,000 in year six, and $2,400 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?
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
Problem 1PS
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Transcribed Image Text: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:
Machine A could be purchased for $11,000. It will last 10 years with annual maintenance costs of $400 per year. After 10 years the
machine can be sold for $1,155.
Machine B could be purchased for $10,000. It also will last 10 years and will require maintenance costs of $1,600 in year three, $2,000
in year six, and $2,400 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?
Note: Do not round intermediate calculations. Round your final answers to nearest whole dollar amount. Use tables, Excel, or a
financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Machine A
Machine B
Esquire should purchase
PV
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