In 2006, Violet Rose Computer Corporation purchased a new quality inspection sys

Question

In 2006, Violet Rose Computer Corporation purchased a new quality inspection system for $550,000. The estimated salvage value was $50,000 after 10 years. Currently the expected remaining life is 7 years with an AOC of $27,000 per year and an estimated salvage value of $40,000. The new president has recommended early replacement of the system with one that costs $400,000 and has a 12 year economic service life, a $35,000 salvage value, and a estimated AOC of $50,000 per year, find the minimum trade in value necessary now to make the presidents replacement economically advantegous.

Explanation / Answer

In the given question discounting rate is missing.So assuming discount rate to   be "r"

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a)Present Value of Cash Outflows from the Old System = 27000*PVIFA(r%,7) - 40000*PVIF(r%,7)

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b)Present Value of Cash Outflows from the New System = 400,000 + 50,000*PVIFA(r%,12) - 50,000*PVIF(r%,12)

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The minimum trade in value necessary now to make the presidents replacement economically advantegous = (b)-(a)

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