Should You Buy the Machine or Not?

Analysis of Machine Purchase Decision

Given data:

Machine Cost (MC) = $50,000

Annual Contribution (AC) = $12,000

Number of Years (N) = 5

Borrowing Cost Rate (R) = 10% or 0.10

The Present Value (PV) of the machine's future contributions is:

PV = AC * [(1 - (1 + R)^(-N)) / R]

PV = $12,000 * [(1 - (1 + 0.10)^(-5)) / 0.10]

PV = $12,000 * 3.79078676941

PV = $45,489.44

Now, we compare the PV with the Machine Cost:

If PV ≥ MC, then it's advisable to purchase the machine.

If PV

Because the present value of the machine's future contributions is $45,489.44 which is less than the machine cost of $50,000. Therefore, it is not advisable to purchase the machine.

Therefore, based on the analysis, the machine should not be purchased.