QZY Inc. is evaluating new widget machines offered by three companies: Company A
ID: 1099943 • Letter: Q
Question
QZY Inc. is evaluating new widget machines offered by three companies:
Company A
Company B
Company C
First Cost, $
15,000
25,000
20,000
Maintenance & Operating Costs, $
1,600
400
900
Annual Benefit, $
8,000
3,000
9,000
Salvage Value, $
3,000
6,000
4,500
Useful Life, in years
4
4
4
MARR = 15%. From which company, if any, should you buy the widget machine? Use rate of return analysis.
Neither can be selected
Company C
Company A
Company B
Company A
Company B
Company C
First Cost, $
15,000
25,000
20,000
Maintenance & Operating Costs, $
1,600
400
900
Annual Benefit, $
8,000
3,000
9,000
Salvage Value, $
3,000
6,000
4,500
Useful Life, in years
4
4
4
Explanation / Answer
Hi,
Please find the detailed answer as follows:
You need to calculate the NPV to take the decision
NPV
Machine A = -15000 + (8000-1600)/(1+.15)^1 + (8000-1600)/(1+.15)^2 + (8000-1600)/(1+.15)^3 + (8000-1600)/(1+.15)^4 + 3000/(1+.15)^4 = 4987.12
Machine B = -25000 + (3000-400)/(1+.15)^1 + (3000-400)/(1+.15)^2 + (3000-400)/(1+.15)^3 + (3000-400)/(1+.15)^4 + 6000/(1+.15)^4 = -14146.54
Machine C = -20000 + (9000-900)/(1+.15)^1 + (9000-900)/(1+.15)^2 + (9000-900)/(1+.15)^3 + (9000-900)/(1+.15)^4 + 4500/(1+.15)^4 = 5698.21
Based on the above calculations, you should buy from Company C as it offers the highest NPV.
Option B (Company C) is the correct answer.
Thanks.