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A 3-year-old machine purchased by the company for $200,000 is getting old and unable to meet...

A 3-year-old machine purchased by the company for $200,000 is getting old and unable to meet today’s market demands. The machine can be upgraded now for $80,000 or sold for $40,000. The current machine will have an annual operating and maintenance (O&M) cost of $100,000 and a $30,000 salvage value in 3 years. If upgraded, the old machine will be retained for only 3 more years, then replaced with a new machine.

The replacement machine, which can serve the company now and for at least 8 years, costs $200,000. In addition, there are shipping and handling charges of $20,000. Its salvage value will be $40,000 for years 1 through 4; $20,000 after 5 years; and $10,000 thereafter. It will have an annual operating and maintenance cost of $65,000 per year.

The company wants to perform an economic analysis at 15% per year using a 3-year planning horizon.

Compare the Capital Recovery (CR) for the replacement machine (challenger) over the study period of 3 years and an expected life of 8 years. Use 4 decimal places of the compound interest factors to do your calculation. Show detailed steps of your replacement analysis.

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Expert Solution

PARTICULARS EXISTING
$
IF WE UPGRADE THE EXISTING MACHINE 80000
OPERATING & MAINT . COST 100000
FOR THREE YEARS
PRESENT VALUE FACTOR 15% FOR THREE YEARS 2.283
PRESNET VALUE OF OPERATING COST IS 100000*2.283 228300
308300
SCRAP VALUE AT THE END OF THREE YEAR 30000
LESS PRESNT VALUE FACTOR IN YEAR THREE   OF SCRAP 0.657 19710
PRESNT VALUE OF NET CASH FLOW 288590
EQUIVALENT CASH OUFLOW PER ANNUM 288590/2.283 126408.2348
PURCHASE COST OF NEW MACHINE 200000+20000 220000
PLUS SHIPPING CHARGE
LESS SALE VALUE OF OLD MACHINE 40000
NET CASH FLOW IN YEAR 1 180000
OPERATING & MAINT . COST 65000
FOR THREE YEARS
PRESENT VALUE FACTOR 15% FOR THREE YEARS 2.283
PRESNET VALUE OF OPERATING COST IS 65000*2.283 148395
SCRAP VALUE AT THE END OF THREE YEAR 40000
LESS PRESNT VALUE FACTOR IN YEAR THREE   OF SCRAP 0.657 26280
PRESNT VALUE OF NET CASH FLOW 302115
EQUIVALENT CASH OUFLOW PER ANNUM 302115/2.283 132332.4573
IN THIS EQUIVALENT CASH OUFLOW PER ANNUM IS LOWER IN CASE 1 AS UP
GRADING THE MACHINE. SO WE GO FOR UPGRADTION   FOR THREE YEARS AND AFTER
THAT GO PURCHASE OF NEW MACHINE
CAPITAL RECOVERY MEANS
RETURN OF INVESTED CAPITAL OVER AN INVESTMENT LIFE SPAN

jeff jeffy answered 1 year ago
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