Herald Richter and Associates 5 years ago purchased for $45,000 a microwave sign

Question

Herald Richter and Associates 5 years ago purchased for $45,000 a microwave signal graphical plotter for corrosion detection in concrete structures. It is expected to have the market values and annual operating costs shown for the rest of its useful life of up to 3 years. It could be traded now at an appraised market value of $8000. A replacement plotter with new Internet based digital technology costing $125,000 has an estimated $10,000 salvage value after its 5-year life and an AOC of $31,000 per year. At an interest rate of 15% per year, determine how many more years Richter should retain the present plotter.

Explanation / Answer

If the company retains the plotter for one year, it will forego 8000$ and interest on it 15%. It will incur cost of $50000 during the year and will sell it at $6000 after 1 year.

So, payoff will be = -8000(1.15) - 50000 + 6000

= -9200 - 44000

= -53200

If the company retains the plotter for two years, it will forego 8000$ and interest on it 15% for 2 years. It will incur cost of $53000 during the year and will sell it at $4000 after 2 years.

So, payoff will be = -8000(1.15)^2 - 53000 + 4000

= -10580 - 49000

= -59580

If the company retains the plotter for three years, it will forego 8000$ and interest on it 15% for 3 years. It will incur cost of $26000 during the year and will sell it at $1000 after 3 years.

So, payoff will be = -8000(1.15)^3 - 26000 + 1000

= -12167 - 25000

= -37167

A replacement plotter will have a payoff = -125000 (a/p,15%,5) - 31000 + 10000(a/f,15%,5)

=66807

Since payoff is greater after 1 year, so Richter should keep it for 1 year and replace then.

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