Question

JRT Publishers is contemplating of installing a labor-saving printing equipment. It has a choice between two
different models. Model A will cost P1,452,000 while model B will cost P1,460,000. The anticipated repair costs
for each model are as follows:
Model A: P152,000 at the end of 9th year
Model B: P60,000 at the end of 5th year and P80,000 at the end of 10th year
The two models are alike in all other respects. If the publisher is earning a 7% return of its capital, which model
should be purchased? Why?

Answer 1

For Model A

Present Value of Repairs at the end of 9th year = 152,000 * PVF (n=9yrs, i=7%)

                                                                    = 152,000 * 0.54393

                                                                    = 82,677.36

Total Cash Outflow = 82,677.36 + 1,452,000 = 1,534,677.36

For Model B

Present Value of Repairs at the end of 5th year = 60,000 * PVF (n=5yrs, i=7%)

                                                                    = 60,000 * 0.71299

                                                                    = 42,779.40

Present Value of Repairs at the end of 5th year = 80,000 * PVF (n=10yrs, i=7%)

                                                                    = 80,000 * 0.50834

                                                                    = 40,667.20

Total Cash Outflow = 42,779.40 + 40,667.20 + 1,460,000 = 1,543,446.60

As cash outflow for Model A is lesser, Model A should be purchased