A company is considering replacing a painting machine purchased 9 years ago for

Question

A company is considering replacing a painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M; costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Analyze this using an EUAC measure and a MARR of 20% to perform a before-tax analysis to see if the painting machine should be replaced if the old painting machine is taken in as a trade-in for its market value of $40,000. Use the cash flow approach (insider's viewpoint approach). Use the opportunity cost approach (outsiders viewpoint approach).

Explanation / Answer

Incremental initial cost = $(800,000 - 40,000) = $760,000

Incremental annual O&M Cost = $(120,000 - 350,000) = - $230,000

Incremental salvage value = $(100,000 - 0) = $100,000

(a) Using cash flow approach, we compur EUAC as:

EUAC ($) = 760,000 x A/P(20%, 10 years) - 230,000 - 100,000 x P/F(20%, 10 years)

= 760,000 x 0.24 - 230,000 - 100,000 x 0.16

= 182,400 - 230,000 - 16,000

= - 63,600

A negative incremental EUAC of $63,600 means that purchase of new machine will yield an annual equivalent benefit of $63,600 over the old machine. Therefore the new machine should be purchased.

(b) EUAC cannot be computed with opportunity cost approach. An IRR analysis can be done but that considers entire project life, and not EUAC on an annual basis only.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.