Question

How would you calculate this on a TI BA II Plus:

ACE Co. is considering the purchase of two machines. Machine A costs $100,000 with annual cost of $20,000. It will last for 5 years, and have a salvage value of $5,000 at the end of 5 years. Machine B costs $145,000 with annual costs of $17,500, and has a useful life of 8 years. The discount rate is 10%. Which machine should the company buy?

Answer 1

Machine A
Year	Cash Flows	PV Factor @10%	Discounted cash flow
0	$ (100,000.00)	1	$ (100,000.00)
1	$    (20,000.00)	0.909091	$    (18,181.82)
2	$    (20,000.00)	0.826446	$    (16,528.93)
3	$    (20,000.00)	0.751315	$    (15,026.30)
4	$    (20,000.00)	0.683013	$    (13,660.27)
5	$    (20,000.00)	0.620921	$    (12,418.43)
5	$        5,000.00	0.620921	$        3,104.61
Present value of cash flows			$ (172,711.13)
Outflow per year (Present Value /5)			$    (34,542.23)

Machine B
Year	Cash Flows	PV Factor @10%	Discounted cash flow
0	$ (145,000.00)	1	$ (145,000.00)
1	$    (17,500.00)	0.909091	$    (15,909.09)
2	$    (17,500.00)	0.826446	$    (14,462.81)
3	$    (17,500.00)	0.751315	$    (13,148.01)
4	$    (17,500.00)	0.683013	$    (11,952.74)
5	$    (17,500.00)	0.620921	$    (10,866.12)
6	$    (17,500.00)	0.564474	$      (9,878.29)
7	$    (17,500.00)	0.513158	$      (8,980.27)
8	$    (17,500.00)	0.466507	$      (8,163.88)
Present value of cash flows			$ (238,361.21)
Outflow per year (Present Value /8)			$    (29,795.15)

Even though Machine B has higher cash outflow it should be accepted because of lower per year cash outflow.

Final Decision---Company should buy machine B