Five years ago, Jaguar manufacturing installed production machinery that had a f

Question

Five years ago, Jaguar manufacturing installed production machinery that had a first cost of $25,000. At that time, initial yearly costs were estimated at $3,000, increasing by 10% each year. The market value of this machinery each year would be 70% of the previous year's value. There is a new machine available now that has a first cost of $26, 800 and no yearly cost over its 5-year minimum cost life. If jaguar uses an 8% before-tax MARR, when, if at all, should jaguar replace the existing machinery with the new unit? Why?

Explanation / Answer

Year Salvage Value Initial Yearly Cost -5 25000 -4 17500 3000 -3 12250 3300 -2 8575 3630 -1 6003 3993 0 4202 4392 Current Annual cost 4392 Current Salvage Value 4202 Current price of new machine 26800 Net Out flow for new machine 22598 Annual Saving for new machine 4392 Annuity factor @ 8% for 5 years 3.993 Present value of Annual saving 3.993x4392 17538 Year Saving in Yearky cost Net cost of new machine Total cash flow DF @ 8% PV 0 -22598 -22598 1 -22598 1 4392 4392 0.926 4067 2 4831 4831 0.857 4142 3 5314 5314 0.794 4219 4 5846 5846 0.735 4297 5 6430 6430 0.681 4376 NPV -1498 NPV -1498 Decision: New should not be brought Note : taxes is ignored.

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