Question

A company is considering replacing a machine that was bought five years ago for ​$45,000. The​ machine, however, can be repaired and its life extended four more years. If the current machine is​ replaced, the new machine will cost ​$44,000 and will reduce the operating expenses by ​$5,200 per year. The seller of the new machine has offered a​ trade-in allowance of $14,700 for the old machine. If MARR is 8​% per year before​ taxes, how much can the company spend to repair the existing​ machine?

Answer 1

The amount of repair that company could spend on repair on existing machine is maximum $ 12078 (not more than this amount).

The explanation is as follows:

The present value of cost icnurred on new machine (taken for four years)

Net initial investment in new machine after adjusting trade-in value ($ 44,000 -$14,700) = ($29,300)

Present value of savings in expense for four years (i.e. $ 5200* Annutiy factor for 4 years @8% i.e 3.312)= $17,222

Therefore, present value of cash outflow from new machine:                                                         ($ 12078)

Therefore, the company can plane to spend maximum of $ 12078 on repairs on existing machine. Otherwise, the best option is to replace it with the new machine.