Arrow Manufacturing, a manufacturer of components for large trucks, plans to purchase a new metal lathe to produce drive shafts. After contacting the appropriate vendors, the company's purchasing department received differing terms and options from each vendor. The company’s engineers have determined that the lathe of each vendor is substantially identical to those, of the other manufacturers. The lathe produced by each manufacturer has a useful life of twenty years. Company engineers have estimated that required year-end maintenance costs will be $1000 per year for the first five years, $2,000 per year for the next ten years, and $3,000 per year for the last five years. Each vendor's sale package is described below:
Vendor A – Cash payment of $50,000 at time of delivery and ten year-end payments of $14,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate twenty-year maintenance service contract under which Vendor A will perform year-end maintenance. The price of this maintenance contract is $10,000 payable at time of delivery of the new lathe.
Vendor B – Forty semiannual payments of $8,000 each with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next twenty years at no extra charge.
Vendor C – Full cash price of $125,000 will be due upon delivery. Vendor C offers no maintenance contract. Maintenance would be performed by Arrow Company employees.
Required: Perform an analysis to determine which of the vendors should be chosen to provide the lathe to Arrow. The lathe is to be purchased on January 1. Arrow's cost of funds is 10%. You may assume that Vendors A and B will be able to perform the required year-end maintenance required by their respective service contracts.
The question belongs to Accounting and it discusses about performing an analysis to determine which of the vendors should be chosen for buying a machine.
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