Question

In: Accounting

State-of-the-art digital imaging equipment purchased 2 years ago for $50,000 had an expected useful life of...

State-of-the-art digital imaging equipment purchased 2 years ago for $50,000 had an expected useful life of 5 years and a $5000 salvage value. After its poor installation performance, it was upgraded for $20,000 1 year ago. Increased demand now requires another upgrade for an additional $26,000 so that it can be used for three more years. Its new annual operating cost will be $30,000 with a $13,000 salvage after the 3 years. Alternatively, it can be replaced with new equipment costing $64,000, an estimated AOC of $15,000, and an expected salvage of $24,000 after 3 years. If replaced now, the existing equipment can be traded for only $9,000. Use a MARR of 12% per year.

Solutions

Expert Solution

Total present cost for existing equipment is $ 88,801.79 and that of new equipment is $73,944.74 So replacing of the existing equipment now is preferable.

Explanation:

Upgrading cost of $ 26,000 for existing equipment is considered as initial cost as for comparison with a replacement option now. Previously spend amounts on this equipment are sunk cost and not considered for present value computations.

Cash outflow for existing equipment:

Year 0: $ 26,000

[Cost for up gradation]

Year 1 & 2: $ 30,000

[Annual operating cost]

Year 3: $ 17,000

[Annual operating cost – Salvage value = $ 30,000 - $ 13,000 = $ 17,000]

Cash outflow for existing equipment:

Year 0: $ 55,000

[New equipment Purchasing cost – Market value of existing equipment = $ 64,000 - $ 9,000 = $ 55,000]

Year 1 & 2: $ 15,000

[Annual operating cost]

Year 3: - $ 9,000

[Annual operating cost – Salvage value = $ 15,000 - $ 24,000 = - $ 9,000]

Existing Equipment

New Equipment

Year

PV Factor computation

PV Factor

@ 12 % (F)

Cash Flow (CE)

PVE(= CE x F)

Cash Flow (CN)

PVN (= CN x F)

0

1/(1+12%)^0

1

$26,000

$26,000.00

$55,000

$55,000.00

1

1/(1+12%)^1

0.892857143

$30,000

$26,785.71

$15,000

$13,392.86

2

1/(1+12%)^2

0.797193878

$30,000

$23,915.82

$15,000

$11,957.91

3

1/(1+12%)^3

0.711780248

$17,000

$12,100.26

($9,000)

($6,406.02)

Total PV

$88,801.79

Total PV

$73,944.74

ekkarill92 answered 1 year ago
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