Question

A local graphic design company had purchased a large-scale printer 10 years ago for $180,000. The operations manager conducted a replacement study last year and she found that the current printer could be used for 4 more years before it is replaced. After two years, the owner of the company requested to repeat the replacement study for the printer. The current value for the printer is $22,000 but in order to keep it in service, a sensor should be replaced at a cost of $52,000 to be used for two more years. It is found that the current printer has an annual maintenance & operating cost of $18,000. The other option for the company is to purchase a new largescale printer with a total AW cost of $70,000 per year over 7 years the Economic Life Service. Determine when the printer should be replaced using an interest rate of 10%. work it in excel

Answer 1

There is only 3 Options with the company,
1. Don’t replace the Printrer now, use it for 2 year and replace in the 3rd year
2. Don’t replace the Printrer now, use it for 2 year and replace in the 2nd year
3.Replace Now
Cost of the Printer $180,000 is a sunk cost. Not Relevant for decision making.
Last Year Study revealing 4 years' of life remaining for the machine is also irrelevant as the study has been rpeated again and says 2 years of life is remaining
Now , the relevant amounts are
Current Value of Printer	$22,000
Cost of Sensor to be replaced	$52,000
Annual Maintance & Opearating Cost for next two years	$18,000
Annual AW cost of New Printer	$70,000
If the printer is not repalced now, but after 2 years it will repalced
Current Value of Sensor	$52,000
Present value of Annual Maintenance & Opearting Cost	$31,240	18,000*(0.9091+0.8264)
Value of Machine after 2 years	$16,529	22,000*(0.9091+0.8264)
Annual Cost of old Printer	$66,711	52,000+31240-16529
Annual Cost of New Printer for next 5 years will be	$219,302	70,000(0.7513+0.6830+0.6209+0.5645+0.5132)
Total Cost will be	$286,012	66,711+28,6012
If the printer is not repalced now, Replace next year
Current Value of Sensor	$52,000
Present value of Annual Maintenance & Opearting Cost	$16,364	18,000*(0.9091)
Value of Machine after 2 years	$20,000	22,000*(0.9091)
Annual Cost of old Printer	$48,364	52,000+16,364-20,000
Annual Cost of New Printer for next 6 years will be	$277,153	70,000(0.8264+0.7513+0.6830+0.6209+0.5645+0.5132)
Total Cost will be	$325,517	48,364+27,7153
If the printer is replaced now, there will be no replacement cost and Annual Maintenance & Operating Cost for Existing Printer
The AW cost of New Printer for 7 years	$340,789	70,000(0.9091+0.8264+0.7513+0.6830+0.6209+0.5645+0.5132)
Value of Current Printer	$22,000
Total Cost	$318,789	340,789+22,000
Total Cost
If replaced after 2 years	$286,012
If replaced next year	$325,517
If replaced now	$318,789
Decision: It appears that, if the printers are replaced after 2 years, company will be incurring less cost. Hence it should be replaced after two years
Working
Year	Interest Rate	AW Cost	Operating Cost	Current Value
	10%	70,000	18,000	22000
1	0.9091	63,636	16,364
2	0.8264	57,851	14,876
3	0.7513	52,592
4	0.6830	47,811
5	0.6209	43,464
6	0.5645	39,513
7	0.5132	35,921