Question

Splish Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $940 per year for the first 5 years, $1940 per year for the next 10 years, and $2940 per year for the last 5 years. Following is each vendor’s sales package.

Vendor A: $53190 cash at time of delivery and 10 year-end payments of $18220 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $9300.

Vendor B: Forty semiannual payments of $8920 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge.

Vendor C: Full cash price of $135400 will be due upon delivery.

Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Splish’s cost of funds is 10%, and the machine will be purchased on January 1, compute the following:

Click here to view factor tables

The present value of the cash flows for vendor A. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

The present value of the cash flows for vendor B. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

The present value of the cash flows for vendor C. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The present value of the cash outflows for this option is $

From which vendor should the press be purchased?

The press should be purchased from

Answer 1

The present value of the cash outflows for this option is $			$                              174,444
The present value of the cash outflows for this option is $			$                              160,712
The present value of the cash outflows for this option is $			$                              149,033
Vendor C should be selected. Because of the lowest cash outflow.
Machine will be purchased on January 1, from vendor C.

Year	Present Value factor @10%
1	0.90909
2	0.82645
3	0.75131
4	0.68301
5	0.62092
6	0.56447
7	0.51316
8	0.46651
9	0.42410
10	0.38554
Total	6.14457

Vendor A
For year 0 = 53190 + 9300 maintenance cost contract = 62490
Year	Cash flow	Present value Factor	Present Value
0	$         62,490	1.00000	$                                62,490
1 to 10	$         18,220	6.14457	$                              111,954
The present value of the cash outflows for this option is $			$                              174,444

Year	Present Value factor @5%
0	1.00000
1	0.95238
2	0.90703
3	0.86384
4	0.82270
5	0.78353
6	0.74622
7	0.71068
8	0.67684
9	0.64461
10	0.61391
11	0.58468
12	0.55684
13	0.53032
14	0.50507
15	0.48102
16	0.45811
17	0.43630
18	0.41552
19	0.39573
20	0.37689
21	0.35894
22	0.34185
23	0.32557
24	0.31007
25	0.29530
26	0.28124
27	0.26785
28	0.25509
29	0.24295
30	0.23138
31	0.22036
32	0.20987
33	0.19987
34	0.19035
35	0.18129
36	0.17266
37	0.16444
38	0.15661
39	0.14915
Total	18.01704

Vendor B
Number of payment (20 year *2)			40
Interest rate for semiannual payments (10%/2)			5%
Semiannual	Cash flow	Present value Factor	Present Value
0 to 39	$           8,920	18.01704	$                              160,712
The present value of the cash outflows for this option is $			$                              160,712

Year	Cash flow	Discount Factor @ 10%	Present Value
1	$             940	0.90909	$                855
2	$             940	0.82645	$                777
3	$             940	0.75131	$                706
4	$             940	0.68301	$                642
5	$             940	0.62092	$                584
6	$          1,940	0.56447	$            1,095
7	$          1,940	0.51316	$                996
8	$          1,940	0.46651	$                905
9	$          1,940	0.42410	$                823
10	$          1,940	0.38554	$                748
11	$          1,940	0.35049	$                680
12	$          1,940	0.31863	$                618
13	$          1,940	0.28966	$                562
14	$          1,940	0.26333	$                511
15	$          1,940	0.23939	$                464
16	$          2,940	0.21763	$                640
17	$          2,940	0.19784	$                582
18	$          2,940	0.17986	$                529
19	$          2,940	0.16351	$                481
20	$          2,940	0.14864	$                437
Present value for Maintenance costs			$          13,633

Vendor C
Cash price			$                              135,400
Present value for Maintenance costs			$                                13,633
The present value of the cash outflows for this option is $			$                              149,033

From which vendor should the press be purchased?
The press should be purchased from			Vendor C
Lower present value of outflows is better. Therefore, The press should be purchased from Vendor C.