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In: Accounting

Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new...

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.

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What is the EUAC of the best option using the cash flow approach?

Solutions

Expert Solution

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

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