"A special-purpose turnkey stamping machine was purchased four years ago for $24,000. It was estimated at...

"A special-purpose turnkey stamping machine was purchased four years ago for $24,000. It was estimated at that time that this machine would have a life of 10 years, a salvage value of $2,000, and a removal cost of $700. These estimates are still good. The machine has annual operating costs of $2,600. A new machine that is more efficient will reduce the operating costs to $1200, but it will require an investment of $24,000 plus $1,900 for installation. The life of the new machine is estimated to be 12 years, a salvage of $2,000, and a removal cost of $700. An offer of $4,400 has been made for the old machine, and the purchaser is willing to pay for removal of the machine. Find the ANNUAL EQUIVALENT COST of the preferred alternative (replacing or continuing with the present machine). The firm`s interest rate is 10% for any project justification. Ignore the effect of taxes and depreciation."

Answer between 3408.0 and 3476.0

Solutions

Expert Solution

OLD MACHINE
		PV Factor
Intial Cost	24000	1		24000
Annual Operating Cost	2600	6.14457	15975.88
1	2600	0.90909	2363.634
2	2600	0.82645	2148.77
3	2600	0.75131	1953.406
4	2600	0.68301	1775.826
5	2600	0.62092	1614.392
6	2600	0.56447	1467.622
7	2600	0.51316	1334.216
8	2600	0.46651	1212.926
9	2600	0.4241	1102.66
10	2600	0.38554	1002.404	15975.86
Residual Value (2000-700)	-1300	0.38554		-501.202
Present Value of total cost				39474.65
PVAF, 10%, 10 years				6.14457
ANNUAL EQUIVALENT COST				6424.315

NEW MACHINE
Intial Cost (24000+1900-4400)	21500	1		21500
Annual Operating Cost
1	1200	0.90909	1090.908
2	1200	0.82645	991.74
3	1200	0.75131	901.572
4	1200	0.68301	819.612
5	1200	0.62092	745.104
6	1200	0.56447	677.364
7	1200	0.51316	615.792
8	1200	0.46651	559.812
9	1200	0.4241	508.92
10	1200	0.38554	462.648
11	1200	0.35049	420.588
12	1200	0.31863	382.356	8176.416
Residual Value	-1300	0.31863		-414.22
Present Value of Toatl Cost				29262.2
PVAF, 10%, 12 Years				6.81369
ANNUAL EQUIVALENT COST				4294.618

ekkarill92 answered 1 year ago

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