Question

Tamarisk Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,100 per year for the first 5 years, $2,100 per year for the next 10 years, and $3,100 per year for the last 5 years. Following is each vendor’s sales package. Vendor A: $60,060 cash at time of delivery and 10 year-end payments of $18,850 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $9,500. Vendor B: Forty semiannual payments of $10,280 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge. Vendor C: Full cash price of $159,600 will be due upon delivery. Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Tamarisk’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following:

Answer 1

Vendor A
For First year = 60060 + 9500 maintenance cost contract = 69560
Year	Cash flow	Discount Factor @ 10%	Present Value
0	69560	1.00000	69,560.00
1	18850	0.90909	17,136.36
2	18850	0.82645	15,578.51
3	18850	0.75131	14,162.28
4	18850	0.68301	12,874.80
5	18850	0.62092	11,704.37
6	18850	0.56447	10,640.33
7	18850	0.51316	9,673.03
8	18850	0.46651	8,793.66
9	18850	0.42410	7,994.24
10	18850	0.38554	7,267.49
11		0.35049	-
12		0.31863	-
13		0.28966	-
14		0.26333	-
15		0.23939	-
16		0.21763	-
17		0.19784	-
18		0.17986	-
19		0.16351	-
20		0.14864	-
Present value of payment for vendor A			$                        185,385.09

Vendor B
Interest rate per semi annual = 10% /2= 5% and Number of period = 20 * 2 semia nnual period per year = 40
Year	Cash flow	Discount Factor @ 5%	Present Value
0	10280	1.00000	10,280.00
1	10280	0.95238	9,790.48
2	10280	0.90703	9,324.26
3	10280	0.86384	8,880.25
4	10280	0.82270	8,457.38
5	10280	0.78353	8,054.65
6	10280	0.74622	7,671.09
7	10280	0.71068	7,305.80
8	10280	0.67684	6,957.91
9	10280	0.64461	6,626.58
10	10280	0.61391	6,311.03
11	10280	0.58468	6,010.50
12	10280	0.55684	5,724.29
13	10280	0.53032	5,451.70
14	10280	0.50507	5,192.10
15	10280	0.48102	4,944.86
16	10280	0.45811	4,709.39
17	10280	0.43630	4,485.13
18	10280	0.41552	4,271.55
19	10280	0.39573	4,068.15
20	10280	0.37689	3,874.42
21	10280	0.35894	3,689.93
22	10280	0.34185	3,514.22
23	10280	0.32557	3,346.87
24	10280	0.31007	3,187.50
25	10280	0.29530	3,035.71
26	10280	0.28124	2,891.15
27	10280	0.26785	2,753.48
28	10280	0.25509	2,622.36
29	10280	0.24295	2,497.49
30	10280	0.23138	2,378.56
31	10280	0.22036	2,265.30
32	10280	0.20987	2,157.42
33	10280	0.19987	2,054.69
34	10280	0.19035	1,956.85
35	10280	0.18129	1,863.66
36	10280	0.17266	1,774.92
37	10280	0.16444	1,690.40
38	10280	0.15661	1,609.90
39	10280	0.14915	1,533.24
40		0.14205	-
Present value of payment for vendor B			$                        185,215.18

Vendor C
Payment of machine and year-end maintenance costs separetely incurred by Tamarisk Inc.
Year	Cash flow	Discount Factor @ 10%	Present Value
0	159600	1.00000	159,600.00
1	1100	0.90909	1,000.00
2	1100	0.82645	909.09
3	1100	0.75131	826.45
4	1100	0.68301	751.31
5	1100	0.62092	683.01
6	2100	0.56447	1,185.40
7	2100	0.51316	1,077.63
8	2100	0.46651	979.67
9	2100	0.42410	890.60
10	2100	0.38554	809.64
11	2100	0.35049	736.04
12	2100	0.31863	669.12
13	2100	0.28966	608.30
14	2100	0.26333	553.00
15	2100	0.23939	502.72
16	3100	0.21763	674.65
17	3100	0.19784	613.32
18	3100	0.17986	557.56
19	3100	0.16351	506.87
20	3100	0.14864	460.80
Present value of payment for vendor C			$                        174,595.18

Present value for Vendor A			$                        185,385.09
Present value for Vendor B			$                        185,215.18
Present value for Vendor C			$                        174,595.18
Vendor C should be selected. Because of the lowest cash outflow.
Machine will be purchased from vendor C.