Question

A CNC machine has an initial cost of $75,000. It is expected that its market value will be lower by $4000 every year. The net annual revenue is estimated as $11,000 in the first year, but it is also expected to increase by $950 every year. The equipment will have a maximum useful life of 5 years. The company's MARR is 10% per year. When is the best time to abandon the equipment? Explain your answer showing all of your calculations.

Answer 1

MARR = 10%

EUAC for 1 yr of use = 75000*(A/P,10%,1) + 11000 - (75000-4000)*(A/F,10%,1)

= 75000*1.1 + 11000 - 71000

= 22500

EUAC for 2 yr of use = 75000*(A/P,10%,2) + 11000 + 950 *(A/G,10%,2) - (75000-2*4000)*(A/F,10%,2)

= 75000*0.576190 + 11000 + 950 *0.476190 - (75000-2*4000)*0.476190

= 22761.90

EUAC for 3 yr of use = 75000*(A/P,10%,3) + 11000 + 950 *(A/G,10%,3) - (75000-3*4000)*(A/F,10%,3)

= 75000*0.402115 + 11000 + 950 *0.936556 - (75000-3*4000)*0.302115

= 23015.11

EUAC for 4 yr of use = 75000*(A/P,10%,4) + 11000 + 950 *(A/G,10%,4) - (75000-4*4000)*(A/F,10%,4)

= 75000*0.315471 + 11000 + 950 *1.381168 - (75000-4*4000)*0.215471

= 23259.64

EUAC for 5 yr of use = 75000*(A/P,10%,5) + 11000 + 950 *(A/G,10%,5) - (75000-5*4000)*(A/F,10%,5)

= 75000*0.263797 + 11000 + 950 *1.810126 - (75000-5*4000)*0.163797

= 23495.57

As annual cost is lowest for 1 yrs of use, machine should be replaced after 1 yr