A plant (in a corporation with a MARR = 10%) has an existing Machine (Machine 00
ID: 2729847 • Letter: A
Question
A plant (in a corporation with a MARR = 10%) has an existing Machine (Machine 007) on their plant floor with a current market value of $176,000. Based on auction price data from similar machines, the estimated market values over the next three years are $152,000, $120,000, and $80,000 respectively. Annual R & M costs are $36,000 in present dollars but estimated to increase at an annual rate of 4.1% over the next three years. The Challenger Machine has a 6-year economic life with an EUAC = $88,420 over this time frame. Given the above, when should the plant consider replacing Machine 007 with the Challenger Machine?
Explanation / Answer
The EUAC of the defender is as given below:
The EUAC of the Challenger has a EUAC of $88,420 over an economic life of 6 years.
As the EUAC of the defender (the existig plant) for its remaining life, whether it is one year or two years of three years, is less than the EUAC of the challenger, the defender need be replaced only after the third year.
1 2 3 annual R&M costs 37476 39013 40612 pvif @ 10% 0.9091 0.8264 0.7513 pv 34069 32242 30512 cumulative pv 34069 66311 96823 salvage value 152000 120000 80000 pv of salvage value 138182 99174 60105 initial cost 176000 176000 176000 PV of net cash flows if the plant is sold at the end of the year (cumulative pv of R&M costs + initial cost - PV of salvage value) 71887 143137 212718 pvifa @ 10% 0.9091 1.7355 2.4869 EUAC 79076 82474 85537Related Questions
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