Question

For a new punch press, company A charges $250,000 to deliver and install it. Company A has estimated that the machine will have operating and maintenance (O&M) costs of $4000 a year. You estimate an annual benefit of $89,000. Company B charges $205,000 to deliver and install the device. Company B has estimated O&M of the press at $4300 a year. You estimate an annual benefit of $86,000. Both machines will last 5 years and can be sold for $15,000. Use an interest rate of 12%. Which machne should your company buy? (please do not use excel)

Answer 1

Statement showing NPV of offer of company A

Particulars	0	1	2	3	4	5
Cost of Machine	-250000
Annual benefit		89000	89000	89000	89000	89000
O&M costs		-4000	-4000	-4000	-4000	-4000
Sale of Machine						15000
Total Cash Flow	-250000	85000	85000	85000	85000	100000
PVIF @ 12%	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674
PV	-250000	75892.86	67761.48	60501.32	54019.04	56742.69	64917.38

Statement showing NPV of offer of company B

Particulars	0	1	2	3	4	5
Cost of Machine	-205000
Annual benefit		86000	86000	86000	86000	86000
O&M costs		-4300	-4300	-4300	-4300	-4300
Sale of Machine						15000
Total Cash Flow	-205000	81700	81700	81700	81700	96700
PVIF @ 12%	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674
PV	-205000	72946.43	65130.74	58152.45	51921.83	54870.18	98021.62

Since NPV of company B is higher it should be selected