An existing machine can be kept if $1,000 is spent now to update it for future s
ID: 2476203 • Letter: A
Question
An existing machine can be kept if $1,000 is spent now to update it for future service requirements. Alternatively, the company can purchase a new machine to replace the old machine. The following estimates have been developed for both the defender and the challenger.
Defender
Challenger
Current MV
$35,500
Purchase price
$51,500
Required upgrade
$1,000
Installation cost
$5,500
Annual Expense
$1,100
Annual expenses
$500
Remaining useful life
6 years
Useful life
10 years
MV at end of useful life
-$500
MV at end of useful life
$6,500
The company’s before tax MARR is 20% per year. Based on the information, should the existing machine be replaced right now? Assume the machine will be needed for an indefinite period of time. (Hint: if you use the AW method you can compare the 2 different useful lives.) (Show your work)
Using AW method, Defender by $927
Using AW method, Challenger by $1,718
Using AW method, Challenger by $927
Using AW method, Defender by $1,718
Defender
Challenger
Current MV
$35,500
Purchase price
$51,500
Required upgrade
$1,000
Installation cost
$5,500
Annual Expense
$1,100
Annual expenses
$500
Remaining useful life
6 years
Useful life
10 years
MV at end of useful life
-$500
MV at end of useful life
$6,500
Explanation / Answer
Defender AW = -36500(A/P, 20%,6)-1100-500(A/F,20%,6)
Challenger AW = -57000(A/P,20%,10)-500+6500(A/F,20%,10)
-10975.79-1100-50.35 = -12126.14 (Defender AW)
-13595.71-500+250.40 = -13845.31 (Challenger AW)
Hence Challenger Annual worth (Cost) is more than defender by $ 1719.17
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