Machine A was purchased last year for $20,000 and had an estimated MV of $2,000

Question

Machine A was purchased last year for $20,000 and had an estimated MV of $2,000 at the end of its six-year life. Annual operating costs are $2,000. The machine will perform satisfactorily over the next five years. A salesman for another company is offering a replacement, Machine B, for $14,000, with an MV of $1,400 after five years. Annual operating costs for Machine B will only be $1,400. A trade-in allowance of $10,400 has been offered for Machine A. If the before- tax MARR is 12% per year, how much is the challenger EUAC?

Explanation / Answer

Cost of Machine B = $14,000

Trade-n allowance for Machine A = $10,000

Actual Cost of Machine B: $14,000 – $10,000 = $4,000

EUAC of Machine B:

EUAC(b) = P(A/P,12%,5) – AM(A/P,12%,5) – S(A/F,12%,5)

EUAC (b) = $4,000*(0.2774) - $1,400*(0.2774) – 1,400*(0.1574)

EUAC = $1,109.6 – 388.3 – 220.3

EUAC of the challenger (B) = $501.

*****

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