Five years ago, Thomas Martin installed prod machinery that had a first cost of
ID: 2550006 • Letter: F
Question
Five years ago, Thomas Martin installed prod machinery that had a first cost of $25,000. At that uction time initial yearly costs were estimated at $1250, increasing by $500 each year. The market value of this machinery each year would be 90% of the pre- vious year's value. There is a new machine available now that has a first cost of $27,900 and no yearly costs over its 5-year minimum cost life. If Thomas Martin uses an 8% before-tax MARR, when, if at all, shoul unit! he replace the existing machinery with the newExplanation / Answer
Solution:
Initial cost of old machine = $25,000
Value of old machine today = $25000*90%*90%*90%*90%*90% = $14,762.25
Initial cost of new machine = $27,000
Incremental cash outflows = $27,000 - $14,762.25 = $12,237.75
Initial yearly cost of old machine = $1,250
Yearly cost of old machine from year 6 to year 10 (Savings of yearly cost in case of replacement with new machine for next 5 years):
Year 6 = $3,750, year 7 = $4,250, Year 8 = $4,750, Year 9 = $5,250, Year 10 = $5,750
As NPV of replacement proposal is positive, therefore existing machine should be replaced with new machine.
Computation of NPV of replacment proposal - Thomas Martin Particulars Amount Period PV Factor Present Value Incremental Cash Outflows: Incremental cash outflows $12,237.75 0 1 $12,237.75 PV of Cash Outflows (A) $12,237.75 Incremental Cash Inflows: Yearly cost savings - Year 1 $3,750.00 1 0.925926 $3,472.22 Year 2 $4,250.00 2 0.857339 $3,643.69 Year 3 $4,750.00 3 0.793832 $3,770.70 Year 4 $5,250.00 4 0.73503 $3,858.91 Year 5 $5,750.00 5 0.680583 $3,913.35 PV of Cash Inflows (B) $18,658.88 Net Present Value (B-A) $6,421.13Related Questions
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