A certain piece ofequipment has an initial cost of $10,000 with an annual maintenance cost of...

A certain piece ofequipment has an initial cost of $10,000 with an annual maintenance cost of $500 per year with no salvage value at the end of its useful life of 4 years. There is an alternative equipment that costs $20,000 with no maintenance cost the first year. However, it has a maintenance cost of $100 the second year and increases $100 per year in subsequent years. Its salvage value is $5,000 and has a useful life of 12 years. The MARR is 8%. Which machine should be selected?

Expert Solution

		Machine A	Machine B
Step : 1	Initial Investment	-10,000	-20,000

Step : 2	Salvage	NIL

Step : 3	Cash Flow
	Particulars	Year (1 to 4)	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12	Total
	Annual Maintainance Cost	-500	-	-100	-200	-300	-400	-500	-600	-700	-800	-900	-1,000	-1,100
														5,000
	Discounting Factor	3.3121	0.9259	0.8573	0.7938	0.7350	0.6806	0.6302	0.5835	0.5403	0.5002	0.4632	0.4289	0.3971

	Present Value	-1,656	-	-86	-159	-221	-272	-315	-350	-378	-400	-417	-429	1,549	-1,478

Step 4	Analysis
	Total Outflow for A
	Initial Investment	-10,000
	Maintainace	-1,656
		-11,656

	Equal per annum (-11,656/4)	-2,914


	Total Outflow for B
	Initial Investment	-20,000
	Maintainace	-1,478
		-21,478

	Equal per annum (-21,478/12)	-1,790

Advise	As per the analysis, a company must invest in Machine B since the Equalized NPV for the machine B is lower than Machine A

jeff jeffy answered 2 years ago

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