Question

In: Finance

The Best Company is reviewing two options for replacing a piece of machinery. The first machine...

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. Determine which machine to purchase? The discount rate is 20%.

Solutions

Expert Solution

Solution :

Since the life of the two machines under consideration is different , the Equivalent annual cost method should be used for making the decision.

As per the Equivalent annual cost method, the machine with the lowest equivalent annual cost should be selected or purchased.

The Equivalent annual cost of Machine 1 with life of 4 years = $ 33,414.46

The Equivalent annual cost of Machine 2 with life of 6 years = $ 36,986.92

Since Machine 1 has the lower Equivalent Annual cost of = $ 33,414.46, the same should be selected.

Hence, the machine to be purchased is Machine 1.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $62,100. The annual variable production costs associated with the old machine are estimated to be $157,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,200 per year for...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $598,100...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $598,100 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,800. The old machine could be sold for $62,000. The annual variable production costs associated with the old machine are estimated to be $158,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,700...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,700 and has $347,700 of accumulated depreciation to date, with a new machine that has a purchase price of $486,500. The old machine could be sold for $64,300. The annual variable production costs associated with the old machine are estimated to be $155,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,200 per year for...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $62,100. The annual variable production costs associated with the old machine are estimated to be $157,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,200 per year for...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $602,600...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $602,600 and has $347,900 of accumulated depreciation to date, with a new machine that has a purchase price of $484,000. The old machine could be sold for $64,400. The annual variable production costs associated with the old machine are estimated to be $155,900 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,500 per year for...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,600...
Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,600 and has $352,200 of accumulated depreciation to date, with a new machine that has a purchase price of $484,300. The old machine could be sold for $63,200. The annual variable production costs associated with the old machine are estimated to be $156,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for...
4 Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost...
4 Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,400 and has $350,500 of accumulated depreciation to date, with a new machine that has a purchase price of $485,900. The old machine could be sold for $62,300. The annual variable production costs associated with the old machine are estimated to be $157,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,300 per year...
Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated...
Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $ 46,800​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $ 75,300 and requires $ 4,300 in installation costs. The new machine would be depreciated under MACRS using a​...
Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated...
Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $ 50, 300 and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $ 76,300 and requires $ 3,600 in installation costs. The new machine would be depreciated under MACRS using...
(i) The followings show two machinery options. OPTION 1: The initial purchase price of the machine...
(i) The followings show two machinery options. OPTION 1: The initial purchase price of the machine is $30,000. The salvage value at the end of the useful life will be $4,000. Maintenance costs are $2,000 for the first year and are estimated to increase by $200 per year. OPTION 2: The machine is leased for an initial payment of $2,000 plus annual payments of $3,500. There is no salvage value. Annual maintenance cost is $10,000. Put down the present value...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT