Question

A mechanical engineer who designs and sells equipment that automates manual labor processes is offering a machine/robot combination that will significantly reduce labor costs associated with manufacturing garage-door opener transmitters. The equipment has a first cost of $170,000, an estimated annual operating cost of $54,000, a maximum useful life of 5 years and a $20,000 salvage value anytime it is replaced. The existing equipment was purchased 12 years ago for $65,000 and has an annual operating cost of $78,000. At most, the currently-owned equipment can be used 2 more years, at which time it will be auctioned off for an expected amount of $6,000, less 33% paid to the company handling the auction. The same scenario will occur if the currently owned equipment is replaced now. Draw cash flow diagrams showing the P, n, S and AOC estimates for both defender and challenger if a replacement analysis is to be conducted today at 20% interest rate.

(GIVE CASH FLOW DIAGRAM FOR DEFENDER AND CHALLENGER WITH COMPLETE FORMULA AND SOLUTION, THANKS)

Answer 1

Given data:

Mechanical engineer designs and sells equipment that automates manual labour processes

The equipment has a first cost = $170,000

Estimated annual operating cost of = 54,000

Maximum useful life = 5 years

Salvage value = $20,000

Existing equipment was purchased 12 years ago = $65,000

Annual operating cost = $78,000

Currently-owned equipment can be used = 2 more years

Auctioned off for an expected amount = $6,000, less 33% paid to the company handling the auction

Ø Value of price(p):

Value of price is equal to the existing machine of market value = $6,000

New machines current price is equal to first cost = $170,000

Ø Time period(n):

The time period equal to the extending period of existing machine

Time period = 2 years

Ø Salvage value:

Salvage value is equal to the actual value company receives in the process of selling the machine.

Since company has to pay 33% to the selling value = $6,000

Salvage value = selling value (1-Auction share)

                        = 6000(1-0.33)

Salvage value = $4620

The new machines life time = 5years

Ø Annual operating cost (AOC):

Annual operating cost is equal to the cost per year required to use the existing machine.

Annual operating cost = $78000

New machines annual operating cost = $54000