Should You Buy the Machine or Not?
Analysis of Machine Purchase Decision
Given data:
Machine Cost (MC) = $50,000
Annual Contribution (AC) = $12,000
Number of Years (N) = 5
Borrowing Cost Rate (R) = 10% or 0.10
The Present Value (PV) of the machine's future contributions is:
PV = AC * [(1 - (1 + R)^(-N)) / R]
PV = $12,000 * [(1 - (1 + 0.10)^(-5)) / 0.10]
PV = $12,000 * 3.79078676941
PV = $45,489.44
Now, we compare the PV with the Machine Cost:
If PV ⥠MC, then it's advisable to purchase the machine.
If PV
Because the present value of the machine's future contributions is $45,489.44 which is less than the machine cost of $50,000. Therefore, it is not advisable to purchase the machine.
Therefore, based on the analysis, the machine should not be purchased.