Question

A machine purchased 3 years ago for $140,000 is now too slow to satisfy the demand of the customers. It can be upgraded now for $77,000 or sold to a smaller company internationally for $38,000. The upgraded machine will have an annual operating cost of $93,000 per year and a $28,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which will serve the company now and for a maximum of 8 years, costs $208,000. Its salvage value will be $42,000 for years 1 through 5; $20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $45,000 per year. Perform an economic analysis at 9% per year using a specified 3-year planning horizon.

a) Determine if the current machine should be replaced now or 3 years from now.

b) Once decided, determine the equivalent AW for the next three years.

a) The current machine should be replaced  (Click to select)  

A. now .
B. three years from now  .

b) The equivalent AW for the next three years is $ -------------

Answer 1

The above question can be solved in various ways yielding different answers. But decision with respect to replace the machine will remain same in all the methods of solving.

However I have selected AW method in this solution. I have clearly explained the calculation and the derivation process. This shall be helpful for you to do the analysis on your own next time. If you still have any doubt you are free to post them in the comment. I will help you for sure.

Lemme know if this has helped you. Good Luck !!!!!!!!!!!  :)