In his *An Elementary Introduction to Mathematical Finance, 3rd Edition* [book][1], pg. 55, Sheldon Ross has a question - 

> A company needs a certain type of machine for the next five years.
> They presently own such a machine, which is now worth 6,000 (dollars)
> but will lose 2,000 in value in each of the next three years, after
> which it will be worthless and unuseable. The (beginning-of-the-year)
> value of its yearly operating cost is 9,000, with this amount expected
> to increase by 2,000 in each subsequent year that it is used. A new
> machine can be purchased at the beginning of any year for a fixed cost
> of 22,000. The lifetime of a new machine is six years, and its value
> decreases by 3,000 in each of its first two years of use and then by
> 4,000 in each following year. The operating cost of a new machine is
> 6,000.

He does Present Value Analysis on cash flows for alternate scenarios, that is, whether a new machine is bought at year 1, 2, 3.. His cash flow for year 1 purchase seems incorrect though. The flow is (in 1000 dollars)

22, 7, 8, 9, 10, −4

It says 22 for year 1 purchase of the new machine - but if the company is buying in the beginning of year 1, shouldn't they pay 22K + 6K = 28K, that is, including the operating costs? The year 2 above shows 7K for operating expense, which looks correct. 

Any ideas?


  [1]: http://www.bib.convdocs.org/v28553/?download=1