Question

The XYZ Company purchased a specialized machine three years ago for $25,000. This machine is not readily resalable and thus assumed to have a salvage value of $0. Operating costs are expected to be $10,000 next year and to increase by $800 per year thereafter (the ‘G’ term). The company has an opportunity to replace this machine with another specialized one for a cost of $12,000. This machine also has no salvage value, a useful life of 10 years, and annual operating costs of $5,000 the first year with annual increases of $1200 thereafter. The minimum acceptable rate of return that this company uses is 15%, thus use this rate. Should the company replace the old machine with the new one, or if not now when might be the best year? Base this determination on a comparison of the “Equivalent Uniform Annual Cost”, or EUAC.

First: Is the consideration of the $25,000 for the initial machine purchase relevant to this discussion?

What other observations or commentary?

Answer 1

Answer to questio

Equivalent Uniform Annual Cost”, or EUAC
		Old	New
	Cost	$                              49,489.19	57469.22
	Discount Factor	2.2832	5.0188
	Outflow	$                              21,675.13	$        11,450.86
	company would replace the old machine with the new one immediately as cost is lower in new machine as compare to old machine
other observations or commentary
	Old machine purchased before 3 years so better to purchase new machine as it will give better result
	operating cost of new machine is lower as compare to old machine
	Yes, consideration of the $25,000 for the initial machine purchase relevant to this discussion
Working
Old Machine
	Year	Cost	Discount Factor	Present Value
Outflow		25000	1	$              25,000.00
Inflow	1	10000	0.8696	$                 8,695.65
	2	10800	0.7561	$                 8,166.35
	3	11600	0.6575	$                 7,627.19
			2.2832	$              49,489.19
New Machine
	Year	Cost	Discount Factor	Present Value
Outflow	0	12000	1	12000
Inflow	1	5000	0.8696	4347.83
	2	6200	0.7561	4688.09
	3	7400	0.6575	4865.62
	4	8600	0.5718	4917.08
	5	9800	0.4972	4872.33
	6	11000	0.4323	4755.60
	7	12200	0.3759	4586.43
	8	13400	0.3269	4380.48
	9	14600	0.2843	4150.23
	10	15800	0.2472	3905.52
			5.0188	57469.22