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Purchase of machinery with a life span

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Reference no: EM131163573

A company considers the following investment projects.  Both projects involve the purchase of machinery with a life span of five (5) years.

  • Project A would generate annual cash flows of $150,000; the machinery would cost $350,000 and have a scrap value of $45,000.
  • Project B would generate annual cash flows of $250,000; the machinery would cost $800,000 and would have a scrap value of $350,000.

The company's discount rate is 12%.  Assume that the annual cash flows arise on the anniversaries of the date of purchase.

Calculate the net present value and payback for each project and state which project the company should accept and why.

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A firm can buy a new printer for $2,000 payable immediately.  The new printer would save the firm of $2,000 the first year of operation, $4,000 in the second year, and $2,000 in the fifth year.

The firm receives no savings from the printer in the third and fourth year of its life, and will need to spend $4,000 on it in the third year due to expensive repairs.  The machine is scrapped at the end of 5 years, but there is no scrap value.

As an alternative to outright purchase, the firs could hire a printer, paying $1000 per year, in advance, for the five (5) years.  The firm would still expect to make the same costs and saving as in the outright purchase, but the hire company would meet the repair cost of year three (3).

If the going rate of interest is 10%, using net present value, advise the firm as to which of the two methods (buy or hire) should be used to obtain the printer.

Reference no: EM131163573

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