Intermediate Accounting 261
Chapter 6 Written Homework Assignment
Nicholas Inc. is in need of a new punch press to increase its production output. Their company policy is to have the purchasing department obtain 3 different vendor bids for any major purchases. The engineering department of Nicholas Inc. has determined that each of the three vendor’s punch presses is substantially identical and each has an estimated useful life of 20 years. Maintenance on the machine is performed at year-end. With a cost of capital of 10%, it is our job to determine which vendor to purchase the new machine from. The engineering department has determined the annual maintenance expense associated with the punch press to be $1000 per year for the first five years, $2000 per year for the next 10 years and $3000 per year for the last five years. To calculate the present value of these accumulated costs you need to calculate the present value of an ordinary annuity of $1,000 for the first five periods plus the present value of an ordinary annuity of $2,000 in periods 6 thru 15 plus the present value of an ordinary annuity in periods 16 thru 20. This is equal to: =1000 x PV of OA + 2000 x PV of OA + 3000 x PV of OA
=1000 x 3.79079 + 2000 x (7.60608-3.79079) + 3000 x (8.51356-7.60608) =$14,143.81
The value of the punch press from Vendor A is equal to $55,000 in cash at delivery and 10 year end payments of $18,000 each. To calculate the present value of the purchase, you need to calculate the present value of an ordinary annuity of $18,000 plus the initial payment of $55,000. This in preset value is equal to: =55000 + 18000 x PV of OA
=55000 + 18000 x 6.14457
Vendor A offers a separate 20-year maintenance service contract valued at $10000 made at the initial purchase. This would save the company $4,143.81 in maintenance costs over the life of the press. Including maintenance costs associated with this punch press, the total amount of money spent on this...
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