Jack bought a machine for $ 200,000 five years ago. He upgraded it for $70,000 t

Question

Jack bought a machine for $ 200,000 five years ago. He upgraded it for $70,000 two years ago. Jack can sell the machine for $80,000 or upgrade it for $80,000 and use it for 4 more years. It is expected to have AOC of $75,000 and a salvage value of $40,000 after the four years. If upgraded, it will be used for 4 years then replaced by a new machine. The new machine costs $300,000, has a life of 8 years, AOC of $55,000, and a salvage value of $50,000. Given that the interest rate is 10%, determine AW of defender and AW of challenger and the upgrade/replace decision.

a)AW of defender= ($116,856.50), AW of challenger= ($106,861.00) select challenger

b)AW of defender = $134,094.16, AW of challenger = $115,605.41 upgrade defender

c)AW of defender= ($134,094.16), AW of challenger= ($115,605.41) select challenger

d)AW of defender = $116,856.50, AW of challenger = $106,861.00 upgrade defender

Explanation / Answer

Option A

AW of defender = -(80000 + 80000)(A/P, 10%, 4) - 75000 + 40000(A/F, 10%, 4) = -160,000*0.3155 - 75000 + 40000*0.2155 = 116860

AW of challenger = -300000(A/P, 10%, 8) - 55000 + 50000(A/F, 10%, 8) = 106,861

Since AW of challenger is smaller, it should be installed.

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