Reference no: EM131351513
(Analysis of Alternatives) Palm Cay Inc. plans to purchase a new metal stamping machine 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 stamping machine is substantially identical and each has a useful life of 30 years. In addition, engineering has estimated that required year-end maintenance costs will be $3,000 per year for the first 10 years, $5,000 per year for the next 10 years, and $12,000 per year for the last 10 years. Following is each vendor’s sale package.
Vendor A: $40,000 cash at time of delivery and 5 year-end payments of $50,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 30-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $47,000.
Vendor B: Forty semiannual payments of $14,000 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 30 years at no extra charge.
Vendor C: Full cash price of $225,000 will be due upon delivery
Instructions Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Palm Cay’s cost of funds is 8%, and the machine will be purchased on January 1, from which vendor should the stamping amchine be purchased?
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