Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $122,500 plus an annual maintenance fee of $9,500 per year for four years. Machine 2 will cost $140,000 with maintenance being an add-on charge. The estimated cost of maintenance is $2,000 the first year, $3,000 the second year, and $4,000 the third year and $5,000 the fourth year. Assume the purchase cost is paid up front, but that maintenance is paid for at the end of each year. Interest is at 4.5%. Ignore income taxes and residual values. Required: Determine and state clearly which machine should be chosen based on present value considerations.

Option A.

Year Cash Flow P V factor P V amount

0.

1.

2.

3.

4.

Total PV of expenses

Option B.

Year Cash Flow P V factor P V amount

0.

1.

2.

3.

4.

Total PV of expenses