In: Accounting
Apricot Computers is considering replacing its material handling
system and either purchasing or leasing a new system. The old
system has an annual operating and maintenance cost of $31,000, a
remaining life of 8 years, and an estimated salvage value of $5,800
at that time.
A new system can be purchased for $237,000; it will be worth
$26,000 in 8 years; and it will have annual operating and
maintenance costs of $19,000/year . If the new system is purchased,
the old system can be traded in for $21,000.
Leasing a new system will cost $22,000/year , payable at the
beginning of the year, plus operating costs of $8,400/year ,
payable at the end of the year. If the new system is leased, the
old system will be sold for $9,400.
MARR is 14%. Compare the annual worths of keeping the old system,
buying a new system, and leasing a new system based upon a planning
horizon of 8 years.
Click here to access the TVM Factor Table Calculator
For calculation purposes, use 5 decimal places as
displayed in the factor table provided. Round answer to 2 decimal
places, e.g. 52.75. The absolute cell tolerance is
±1
What is the EUAC of the best option using the cash flow approach?
Old System | New System | Leasing New System | |||||||||
Sl. No. | Particulars | Year | Cash Flows | PVF/PVAF | PV of Cashflows | Cash Flows | PVF/PVAF | PV of Cashflows | Cash Flows | PVF/PVAF | PV of Cashflows |
A | Cost of Material Handling System | Year 0 | $ - | 1.00000 | $ - | $ 237,000.00 | 1.00000 | $ 237,000.00 | $ - | 1.00000 | $ - |
B | Opportunity Cost/(Benefit) | Year 0 | $ - | $ - | $ - | $ (21,000.00) | 1.00000 | $ (21,000.00) | $ (9,400.00) | 1.00000 | $ (9,400.00) |
C | Annual Lease Payment for First Year | Year 0 | $ - | $ - | $ - | $ - | $ - | $ - | $ 22,000.00 | 1.00000 | $ 22,000.00 |
D | Annual Lease Payment for balance 7 Years | Year 1-7 | $ - | $ - | $ - | $ - | $ - | $ - | $ 22,000.00 | 4.28830 | $ 94,342.71 |
(1-((1+0.14)^(-7)))/0.14 | |||||||||||
E | Annual Operating and Maintenance Cost | Year 1-8 | $ 31,000.00 | 4.63886 | $ 143,804.78 | $ 19,000.00 | 4.63886 | $ 88,138.41 | $ 8,400.00 | 4.63886 | $ 38,966.46 |
(1-((1+0.14)^(-8)))/0.14 | (1-((1+0.14)^(-8)))/0.14 | (1-((1+0.14)^(-8)))/0.14 | |||||||||
F | Salvage Value | Year 8 | $ (5,800.00) | 0.35056 | $ (2,033.24) | $ (26,000.00) | 0.35056 | $ (9,114.54) | $ - | 0.35056 | $ - |
(1/((1+0.14)^8)) | (1/((1+0.14)^8)) | (1/((1+0.14)^8)) | |||||||||
G | $ 141,771.54 | $ 295,023.88 | $ 145,909.16 | ||||||||