Question

1. You are evaluating the purchase of either of two machines used in your brewery. Machine A will last two years, costs $8,000 initially, and then $1,250 per year in maintenance costs. Machine B costs $9,500 initially, has a life of three years, and requires $1,000 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Your interest rate on current debt and the initial purchases is 9 percent and the tax rate is zero. Explain your processes and assumptions

Answer 1

To compare two machine havng different life, it must be neccessary to take common life i.e. 6 years. That means Machine-A will be replaced three times and machine-B will be replaced twice within the span of 6 years.

The Present value of outflows of both the options are as follows:

Machine-A
Year	Cash flows	PVF @9%	Present Value
0	8000	1.000	8000.00
1	1,250	0.917	1146.79
2	9,250	0.842	7785.54
3	1,250	0.772	965.23
4	9,250	0.708	6552.93
5	1,250	0.650	812.41
6	1,250	0.596	745.33
Present value of cash flows			26008.00
Note: the machine is replaced at the end of two after every two years
Machine-B
Year	Cash flows	PVF @9%	Present Value
0	9500	1.000	9500.00
1	1,000	0.917	917.43
2	1,000	0.842	841.68
3	10,500	0.772	8107.93
4	1,000	0.708	708.43
5	1,000	0.650	649.93
6	1,000	0.596	596.27
Present value of cash flows			21322.00
Note: the machine is replaced at the end of three years.
Therefore machine-B shall be purchased.