Question

"Your firm must decide if and when to replace an existing machine. Consider the following information.
Defender: The defender has a current market value of $13,000. Its operating costs over the next year are estimated to be $3,900 and increase by 35% each year. The salvage value is expected to decrease by 40% each year.
Challenger: If and when your firm purchases the challenger, the challenger will cost $24,700 and have operating costs of $2,500 in its first year of operation, increasing by 28% each year thereafter. The salvage (or market) value is expected to decrease by 21% during each year of use.
Assume the MARR is 14% and do not consider any income-tax or depreciation effects.
Assume the total time your firm will need the machine is 3 years. Your firm wants to minimize its total 'present costs' over the span of 3 years. You can replace the machine immediately, after 1 year, after 2 years, or never. You can assume the cost for your firm to purchase the new machine 1 or 2 years later will be the same as it is now, and the pattern of increasing O&M costs and decreasing market values remains the same as is described. Enter the year (0, 1, 2, or 3) when you should replace the current machine. If you should replace the current machine immediately, enter 0. If you should never replace the machine, enter 3."

Answer is 3

Answer 1

The economic analysis to determine the Annual Worth (AW) of Defender and Challenger is following:

Cell	Formulas	Copy to
B4	=B3*0.6	B4:B6
C5	=C4*1.35	C5:C6
D4	=B3-B4	D4:D6
E4	=B3*$E$1	E4:E6
F4	=SUM(C4:E4)	F4:F6
G4	=F4/(1+$E$1)^A4	G4:G6
H4	=G4
H5	=G5+H4	H5:H6
I4	=$E$1*(1+$E$1)^A4/((1+$E$1)^A4-1)	I4:I6
J4	=H4*I4	J4:J6

Copy the same excel table for Challenger

Annual Worth (AW) of challenger is greater than that of Defender in all three years. Therefore, the machine should never be replaced. Hence answer = 3