Question
In: Finance
An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its...
An Engineering company is considering purchasing a piece of
plant equipment and wishes to compare its replacement strategies
for purchase and maintenance over a period of time. The machine’s
initial cost is $170,000 with immediate payment required. Running
Costs including maintenance are $12,000 in year 1, $17,000 in year
2, $24,000 in year 3 and $33,000 in year 4. Payments are required
at the end of each year. Interest rates are 4% p.a. The equipment
will have a salvage value of $27,000 upon replacement. Should the
company replace the equipment every 3 or 4 years?
Solutions
Expert Solution
Compute EAC where the machine is replaced for 3 years & EAC for 4 years and select the replacement period with lower EAC.
EAC = PV of net cashflows / PVAF (r%, n yeasr )
where r is discount factor & n is no. of yeasr for replacement.
If replacement period is 3 years:
If replacement period is 4 years:
EAC if maintained for 4 years is less compared to EAC where machine is replaced for 3 years.
Thus it is advicable to raplace after 4 years rather than 3 years.
jeff jeffy answered 2 years agoRelated Solutions
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