Question

A machine, currently in operation, has a market value of $4000. The machine can still be
used over the next three years, but its market value will become $3000, $2500, $2,000 at
the end of the first, second, and third years, respectively. The operating expenses of the
machine amount to $20,000 during the first year, and will increase by $5,000 each year
thereafter. This machine can be replaced by a newer model, which cost $30,000 for
installation and will have an estimated economic life of 12 years, and a $2,000 market value
at that time. It is estimated that annual operating expenses of the new model will average
$16,000 per year. If the company uses an MARR of 12% :
a) Determine the economic service life of the current machine.
b) Using the Annual Equivalent Cost (AEC) of the new model, determine when the
current machine should be replaced?

Answer 1

Current machine should be replaced now. It has least EAC now