A machine purchased 3 years ago for $140,000 is now too slow to satisty the dema

Question

A machine purchased 3 years ago for $140,000 is now too slow to satisty the demand of the customers. It can be upgraded now for $84,000 or sold to a smaller company internationally for $38.000. The upgraded machine will have an annual operating cost of $78,000 per year and a $28,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which will serve the company now and for a maximum of 8 years, costs $227000 Its salvage value will be $52.000 for years 1 through 5: $20,000 after 6 years, and $10,000 thereafter It will have an estimated operating cost of $45000 per year Perform an economic analysis at 8% per year using a specified 3-year planning horizon. a) Determine if the current machine should be replaced now or 3 years from now b) Once decided, determine the equivalent AW for the next three years a) The current machine should be replaced three years from now b) The equivalent AW for the next three years is $ I

Explanation / Answer

AW1 = -(84000+38000)(A/P, 8%, 3) - 78000+28000(A/F, 8%, 3)

= -122000(0.3880)-78000+28000(.3080)

= -47346-78000+8624

= -116,722

AW2 = -227000(A/P, 8%, 3) -45000+52000(A/F, 8%, 3)

=-227000(0.3880)-45000+52000(0.3080)

= -88076-45000+16016

= -117060

It should not be replaced.

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