Question

Five years ago, Thomas Martin installed production machinery that had a first cost of $25,000. At that time initial yearly costs were estimated at $3000, increasing by 10% each year. The market value of this machinery each year would be 70% of the previous year’s value. There is a new machine available now that has a first cost of $27,900 and no yearly costs over its 5-year minimum cost life. If Thomas Martin uses an 8% before-tax MARR, when, if at all, should he replace the existing machinery with the new unit?

*PLEASE SHOW ALL WORK!!

*Previous post has incorrect answers!!

Answer 1

Given, Initial Cost of existing Machinery = $25,000

Initial Cost of New Machinery = $27,900

Present value of Existing machinery = $25,000 * 0.7*0.7*0.7*0.7*0.7

= $4201.75

Present value of Expenses Saved :

Yearly Cost at Year 5 = 3000*110%*110%*110%*110%*110%

= $4831.53

Year	Expense saved ($) (A)	PVF at 8% (B)	Present value ($) ((C) = (A) * (B))
1	4,832	0.926	4,474.43
2	5,315	0.851	4,523.07
3	5,847	0.794	4,642.52
4	6,432	0.735	4727.52
5	7,075	0.681	4848.08
	TOTAL		23,215.62

Present value of net cash outflows = Cost of new machinery - Resale value of existing machinery

Present value of net cash outflows = $27,900 - 4201.75

= $23,698.25

Title	Amount ($)
	Present value of cash outflow	(23,698.25)
Add:	Present value of expenses saved	23215.62
		($482.63)

Hence, It is beneficial to replace the machinery now as Outflow is a small difference or replace it after one year.