Question

Q: An existing asset A (defender), N*= 2 years for EUAC=$8,000. The cost at year 3 is 9,200 and expected to increased by 4% for the remaining life of the defender. A new asset B (challenger) that would provide the same function is available at N*= 5 years for EUAC=$10,000. Decide which year is eligible for replacement, using tax comparison with i= 10%.

Answer 1

Given information

Defender A EUAC = $ 8000

Remaining life 3 years

Present value 9200

Present increase value 4%

New asset challenger B EUAC =$10000

LIFE 5 Years

I=10%

SOLUTION:

                

Defender value A =9200*1.04*1.04*1.04

                            =10348

PRESENT VALUE OF DEFENDER A VALUE IS =$ 10348(I 10%, 3 years)

                                                                                  = $10348*0.7513

                                                                                   =7775$

PRESENT VALUE OF CHALLENGER B   =$10000 (I 10%, 5 years)

                                                       =$10000*0.6209

                                                        = $ 6209                                                                                                                                     

                                                                                                  

Hence challenger is lower than defender hence existing machine should be replaced.