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PV of costs of machines for Bison

Bison Mfg. is considering two options for purchasing comparable machinery.

Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years.

Machine 2 will cost $25,000 with a varying maintenance charge. The estimated cost of maintenance is $1,000 in the first year, $3,000 in the second year, and $4,000 each in the third year and the fourth year.

Assume that the purchase cost is paid up front, but the maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values.

Required: Determine which machine should be chosen based on present value considerations.

Solution Preview

Bison Mfg. is considering two options for purchasing comparable machinery.

Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years.

Machine 2 will cost $25,000 with a varying maintenance charge. The estimated cost of maintenance is $1,000 in the first year, $3,000 in the second year, and $4,000 each in the third year and the fourth year.

Assume that the ...

Solution Summary

The solution evaluates the options of purchase of machinery by Bison Mfg. by comparing the Present Value (PV) of costs.

$2.19