A company is required to choose between two machines A and B. The two machines are designed differently, but have identical capacity and do exactly the same job. Machine A costs Rs. 6,00,000 and will last for 3 years. It costs Rs. 1,20,000 per year to run. Machine B is an ‘economy’ model costing Rs. 4,00,000 but will last only for two years, and costs Rs. 1,80,000 per year to run. These are real cash flows. The costs are forecasted in rupees of constant purchasing power. Opportunity cost of capital is 10%. Which machine company should buy? Ignore tax. PVIF0.10, 1 = 0.9091, PVIF0. 10, 2 = 0.8264, PVIF0. 10, 3 = 0.7513.
Hint:
1. FInd running cost of machines per year( cost/expected years)
2. Find present value @ 10% df
3. Find total present value of cash outflow of both machines
4. Find Equivalent present value of annual cash outflow
5. GIve Recommendation: ( The Company should buy Machine A since its equivalent cash outflow is less than Machine B.)
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