A building supplies distributor purchased a gasoline-powered fork-lift truck 4 y

Question

A building supplies distributor purchased a gasoline-powered fork-lift truck 4 years ago for $8,000. At that time, the estimated useful life was 8 years with a salvage value of $800 at the end of this time. The truck can now be sold for $2,500. For this truck, average annual operating expenses for year j have been c_j = $2,000 + $400 (j - 1) Now the distributor is considering the purchase of a smaller battery-powered truck for $6,500. The estimated life is 10 years, with the salvage value decreasing by $600 each year. Average annual operating expenses are expected to be $1,200. If a MARR of 10% is assumed and a 4-year planning horizon is adopted, based on a cash flow approach should the replacement be made now

Explanation / Answer

since the total cash outflow to procure and operate the new machine is lesser than old machine, the old machine should be replaced with new machine.

Old Machine 1 2 3 4 Total cashflow operating expenses              (2,000)             (2,400)           (2,800)           (3,200) Dis factor 0.9091 0.8264 0.7513 0.6830        (1,818.18)       (1,983.47)     (2,103.68)     (2,185.64) (8,090.98) New Machine Purchase price -6500 sale of old machine 2500 net outflow -4000 operating expenses -1200 PV annuity factor 4 yrs 10% 3.1699        (3,803.84) out flow in year o        (4,000.00) PV of total cash outlfow        (7,803.84)

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