achine A was purchased last year for $20,000 and had an estimated MV perform sat
ID: 1159283 • Letter: A
Question
achine A was purchased last year for $20,000 and had an estimated MV perform satisfactorily over the next five years. A salesperson for er five years. Annual operating costs for Machine B will only be trade-in allowance of $10,400 has been offered for Machine A. If the (6 pts) M of $2,000 at the end o machine will f its six-year life. Annual operating costs are $2.000. The $14,000, with an MV another company is offering a replacement, Machine B, tor e0 before-ta MARR is 12% per year, should you buy the new machine?Explanation / Answer
Answer:
OPTION 1. Continue Machine A:
Total out flow of operating cost: $2000*Annuity Factor of 12% for 5years= $2000*3.605=$7210
Present value of MV of $2000: $2000*0.567(PV factor of 12% at 5th year end) =$1134
So Total outflow at present value = $7210 - $1134 =$6076
So EUAC = $6076/3.605 = $ 1685.4
Option 2. Purchasing Machine B
Total present value of operating cost = $1400*3.605=$5047
Present value of MV of $1400: $1400*0.567(PV factor of 12% at 5th year end) = $794
Present out flow at the inception = $14000-$10400 = $3600
So total uot flow at present value = $5047+$3600-$794 = $7853
So EUAC = $7853/3.605 = $ 2178.4
Challenger EUAC is more by $493
So Machine A shall not be replaced.
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