question archive Present-Worth Comparison: Project Lives Shorter than the Analysis Period The Smith Novelty Company, a mail-order firm, wants to install an automatic mailing system to handle product announcements and invoices
Present-Worth Comparison: Project Lives Shorter than the Analysis Period The Smith Novelty Company, a mail-order firm, wants to install an automatic mailing system to handle product announcements and invoices
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Present-Worth Comparison: Project Lives Shorter than the Analysis Period
The Smith Novelty Company, a mail-order firm, wants to install an automatic mailing system to handle product announcements and invoices. The firm has a choice between two different types of machines. The two machines are designed differently, but have identical capacities and do exactly the same job. The $12,500 semiautomatic model A will last three years, while the fully automatic model B will cost $15,000 and last four years. The expected cash flows for the two machines, including maintenance, salvage value, and tax effects, are as follows:
n Model A Model B 0 -$12,500 -$15,000 1 -5,000 -4,000 2 -5,000 -4,000 3 -5,000 + 2,000 -4,000 4 -4,000 + 1,500 5
As business grows to a certain level, neither of the models may be able to handle the expanded volume at the end of year 5. If that happens, a fully computerized mail ordersystem will need to be installed to handle the increased business volume. In the scenario just presented, which model should the firm select at MARR = 15%?
