A local chemical company is considering replacing its existing distillation colu

Question

A local chemical company is considering replacing its existing distillation column with a new more efficient column. The new column costs $30 million. It has a life of 10 years and a salvage value 500,000. The existing column cost $2.0 million, will last 4 more years and have no salvage value. It could be sold now for $1,400,000. The new column is expected to save $300,000 per year. If the interest rate is 8%, determine if the new column should be purchased. Solve by both present worth and annual cash flow analysis methods.

Explanation / Answer

present worth of old column=1,400,000 $ present worth of new column=0 annual cash flow analysis methods. old column can last for 4 year present worth =1,400,00 new column pay back time =>30 million-3 million *t=0 t=10 year which is lifetime so installing new column is not preferred

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