Bison Mfg Is Considering Two Options for Purchasing Comparable Machinery

Essay

Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid the same day as buying the machinery, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values.
Required: Determine which machine should be chosen based on present value considerations.