Machine A was purchased last year for $20,000 and had an estimated MV of $2,000

Question

Machine A was purchased last year for $20,000 and had an estimated MV of $2,000 at the end of its six-year life. Annual operating costs are $2,000. The machine will perform satisfactorily over the next five years. A salesman for another company is offering a replacement, Machine B, for $14,000, with an MV of $1,400 after five years. Annual operating costs for Machine B will only be $1,400. A trade-in allowance of $10,400 has been offered for Machine A. If the before- tax MARR is 12% per year, how much is the challenger EUAC?

Explanation / Answer

OPTION 1. Continue Machine A:

Total out flow of operating cost: $2000*Annuity Factor of 12% for 5years= $2000*3.605=$7210

Present value of MV of $2000: $2000*0.567(PV factor of 12% at 5th year end) =$1134

So Total outflow at present value = $7210 - $1134 =$6076

So EUAC = $6076/3.605 = $ 1685.4

Option 2. Purchasing Machine B

Total present value of operating cost = $1400*3.605=$5047

Present value of MV of $1400: $1400*0.567(PV factor of 12% at 5th year end) = $794

Present out flow at the inception = $14000-$10400 = $3600

So total uot flow at present value = $5047+$3600-$794 = $7853

So EUAC = $7853/3.605 = $ 2178.4

Challenger EUAC is more by $493

So Machine A shall not be replaced.

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