Reference no: EM132548791

Management at PikaPika Corporation, an electrical equipment manufacturing company, are looking to purchase a new piece of manufacturing equipment to replace one that is currently failing. They plan on a 10-year replacement with the hopes that technology will soon catch up and allow them to make some major sustainability upgrades in the future.

You have been given the following information about the three pieces of equipment and asked to decide which equipment should be purchased:

1. Equipment A - Requires a down payment of $50,000 and annual payments of $15,000 during the 10-year life of the equipment. Management expects this particular model to increase annual cost savings by $25,000 throughout the life of the equipment. After 10 years, the equipment will have a $30,000 salvage value.
2. Equipment B - Requires a down payment of $70,000 and annual payments of $13,000 during the 10-year life of the equipment. Management expects this particular model to increase annual cost savings by $27,000 throughout the life of the equipment. After 10 years, the equipment will have a $25,000 salvage value.
3. Equipment C - Requires a down payment of $90,000 and annual payments of $11,000 during the 10-year life of the equipment. Management expects this particular model to increase annual cost savings by $28,500 throughout the life of the equipment. After 10 years, the equipment will have a $35,000 salvage value.
4. All three equipment models require an initial down payment and annual cash payments during the life of the equipment. PikaPika Corporation has a discount rate of 14% and will not accept any investments that return negative or zero-dollar net present value.

Question 1: Compute your answers using the PV Table provided. If you don't have a copy of the PV Table accessible, you may access one here: PV Table 30 Years 20 Percent.pdf.

To make your calculations a little easier (and faster), the sum of the PV factors for a 14% discount rate is 5.217 (Years 1-10).