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Posted on Dec 05, 2023

Nashua is looking into the option of expanding its dyeing business. Business is booming, and Nashua is considering buying a new printer. Two printers are

Nashua is looking into the option of expanding its dyeing business. Business is booming, and Nashua is considering buying a new printer. Two printers are available on the market: printer X costs R60,000, requires R 6,000 per year to operate, and has a useful life of two years; printer Y costs R70,000, requires R8,000 per year to operate, and will need to be replaced every three years. Nashua’s cost of capital is 10 percent.

Required:

1. What are the present values of the total costs of the two printers over their useful life? (4)

2. Why are the two present values not comparable? (4)

3. What is the annual-equivalent cost for each of the printers? (4) 3.4. Which printer should Nashua purchase?

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SOLUTION To answer your questions well calculate the present values of the total costs for the two printers over their useful life and determine the annualequivalent cost for each printer Based on these calculations well be able to determine which printer Nashua should purchase 1 Present values of the total costs of the two printers over their useful life Printer X Initial cost R60000 Annual operating cost R6000 Useful life 2 years To calculate the present value of the total costs we need to consider the initial cost and the present value of the annual operating costs over the useful life The present value of the annual operating costs can be calculated using the formula PV C 1 1 rn r Where PV is the present value C is the annual cash flow r is the discount rate cost of capital and n is the number of years Using a discount rate of 10 percent 010 Present value of annual operating costs for Printer X R6000 1 1 0102 010 R6000 1 112 010 R6000 1 0826 010 R6000 0174 010 R10440 Total present value of costs for Printer X Initial cost Present value of annual operating costs R60000 R10440 R70440 Printer Y Initial cost R70000 Annual operating cost R8000 Useful life 3 years Similarly well calculate the present value of the total costs for Printer Y Present value of annual operating costs for Printer Y R8000 1 1 0103 010 R8000 1 113 010 R8000 1 0751 010 R8000 0249 010 R19920 Total present value of costs for Printer Y Initial cost Present value of annual operating costs R70000 R19920 R89920 2 The two present values are not directly comparable because they represent the total costs over different time periods Printer X has a useful life of 2 years while Printer Y has a useful life of 3 years To compare them we need to calculate the annualequivalent cost for each printer 3 Annualequivalent cost for each printer Annualequivalent cost is the cost per year that takes into account the initial cost and the present value of the annual operating costs Printer X Annualequivalent cost Total present value of costs Useful life R70440 2 R35220 Printer Y Annualequivalent cost Total present value of costs Useful life R89920 3 R2997333 rounded to 2 decimal places Based on the ... blur-text-image