XYZ Corporation
The production department of XYZ Corporation is thinking of buying one of two numerically controlled zipper machines. Either would last 10 years. Additionally, the costs, in $ x 103, are:
Assume that the annual costs are paid at the end of each year and the salvage value at the end of the tenth year. Using a discount rate of 15%:
|
|
Machine X
|
Machine Y
|
|
Initial Investment
|
20
|
30
|
|
Salvage Value
|
5
|
7
|
|
Annual Operating Cost
|
12
|
6
|
|
Annual Maintenance Cost
|
2
|
4
|
(a) What is the present worth of the cash flow for machine X? Machine Y?
(b) Which machine should be purchased?
c. Later in the term, you are trying to figure out how much of the initial investment of the machine you purchased to allocate to the annual fixed unit costs of your product. Assuming you want to allocate the same amount each year for the next 10 years, what should that future yearly value be? How much would the machine contribute to the unit costs, assuming you achieve production volumes of 100,000
annually? Assume a discount rate of 15%.