Question
Mike's Company plans to purchase a new piece of equipment. The company can purchase the new equipment from 3 different manufacturers. Upon comparison, the equipment
Mike's Company plans to purchase a new piece of equipment. The company can purchase the new equipment from 3 different manufacturers. Upon comparison, the equipment from the 3 manufacturers is essentially identical, and Mike estimates that the equipment will have a 30-year useful life regardless of which manufacturer it chooses. However, each of the 3 manufacturers has presented different payment plans and maintenance arrangements. Mike has asked you to evaluate its options, assuming that its cost of funds (discount rate) is 6%, and provide a recommendation for the which proposal to accept.
The arrangements are as follows:
Eriksens Equipment: $100,000 cash at the date of purchase, plus annual payments of $8,000 for the following 10 years, starting one year from the purchase date. Under this arrangement, Eriksens Equipment performs all annual maintenance, free of charge, for the entire useful life of the asset.
Mosby Machinery: $55,000 cash at the date of purchase. Under this agreement, Mike is responsible for all year end maintenance, which it estimates will total $1,000 in each of the first 6 years, $5,000 in each of the next 6 years, $12,000 in each of the next 10 years, and $15,000 in each of the next 8 years.
Scherbatsky Schematics: $154,684.48 cash at date of purchase. Scherbatsky performs all year-end maintenance free of charge for the life of the equipment.
Required: Calculate the present value of the three options above, and determine the best option for Mike's Company
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started