Esquire Company seeks 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 $35,750. It will last 10 years with annual maintenance costs of $1,300 per year. After 10 years the machine can be sold for $3,575.
Machine B could be purchased for $32,500. It also will last 10 years and will require maintenance costs of $5,200 in year three, $6,500 in year six, and $7,800 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. (Negative amounts should be indicated by a minus sign.) Calculate the present value of machine A and machine B. Which machine Esquire should purchase?
Net Present Value:
Net present value is a method used in capital budgeting decisions to determine the profitability of a project. It is calculated as the difference between the present value of future cash inflows and the cash outflows. The present value is calculated by discounting the future cash flow at a pre-determined rate.
As per the time value of money concept in accounting, the value of a certain amount of money in the future is much lesser than the value of the same amount at present.
Answer and Explanation: 1
Based on the information given in the question, let us evaluate the two alternative of purchase of Machine A or Machine B.
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fromChapter 5 / Lesson 20
Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.