Reference no: EM131784712

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 re- ceived 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 addi- tion, 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 con- tract, 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?