Question

A company plans to invest in one of the two machines. Machine X has capital cost of $115,000 and annual operation & maintenance cost is $6,000. Income is $45,000 per year. Machine Y will have an initial cost of $105,000. The maintenance fee is $5,000 and the revenue is $25,000 for each year. Both projects have 10 years life. The salvage value is $5,000 for X and $6,000 for Y at the end of its lifetime. Using Present Worth Analysis, determine which one is preferred using interest rate of 10%.

Answer 1

Solution :

Using the Present worth analysis

The Net Present value of Machine X at 10 % interest rate is = $ 126,565.83

= $ 126,566 ( When rounded off to two decimal places )

The Net Present value of Machine Y at 10 % interest rate is = $ 20,204.60

= $ 20,205 ( When rounded off to two decimal places )

The Net Present value of Machine X is higher than that of Machine Y. Hence Machine X is to be chosen or preferred

Please find the attached screenshot of the excel sheet containing the detailed calculation for  the above solution .