Williams Auto has a machine that installs tires. The machine is now in need of r

Question

Williams Auto has a machine that installs tires. The machine is now in need of repair. The machine originally cost $10,700 and the repair will cost $1,700, but the machine will then last two years. The variable (labor) cost of operating the machine is $0.70 per tire. Instead of repairing the old machine, Williams could buy a new machine at a cost of $5,700 that would also last two years; the labor cost per tire would be reduced to $0.50 per tire.

1.) Total cost to repair and Total cost to replace?

2.) Should Williams repair or replace the machine if it expects to install 10,700 tires in the next two years?   

Explanation / Answer

1.Total cost of Repair=Repair cost+Operating cost=$1,700+10,700*$0.70=$1,700+$7,490=$9,190

2.Total cost to replace=$5,700+10,700*$0.5=$5,700+$5,350=$11,050

Williams should repair the machine, because the total cash flows in repair is less than replace

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