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In: Economics

A company wants to buy one of two machines: machine A or machine B. The present...

A company wants to buy one of two machines: machine A or machine B. The present worth of machine A over a life span of 3 years is $2,200 at an interest rate of 10% per year compounded annually whereas the present worth of machine B over a life span of 6 years is $ 3,500 at the same interest rate. Based on the present worth criteria, which machine should the company pick?

Help can someone explain how to do it by hand, as soon as possible? Thanks!

Solutions

Expert Solution

PV of machine A=$2200 with 3 year life

PV of machine B=$3500 with 6 year life

Machine A will be repeated twice for 6 year life. Hemce $2200 will be available at the end of 3rd year.

PV of $2200 today= 2200/(1+10%)^3=2200/1.1^3=2200/1.331=$1652.89

Total PV of machine A=2200+1652.89=$3852.89

Hence PV of machine A is more and machine A shoukd be picked.

Rahul Sunny answered 2 years ago
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