Machine A was purchased three years ago for $10,000 and had an estimated market

Question

Machine A was purchased three years ago for $10,000 and had an estimated market value of $1,800 at the end of its 10-year life. Annual operating costs are $1,500. The machine will perform satisfactorily for the next seven years. A salesman for another company is offering machine B for $50,000 with a market value of $5,000 after 10 years. Annual operating costs will be $600. Machine A could be sold now for $6,500, and the MARR is 15% per year. Using the outsider viewpoint, what is the equivalent uniform annual cost (EUAC) of continuing to use Machine A?

Explanation / Answer

It is assumed that

1. Straight Line method of Depreciaon has been applied for both the machine.

2. Taxation has been ignored.

Machin A Machin B Annual operating costs $ 1500 600 Cash Inflow for salvage value $ 1800 5000 Annuity Factor of 15% for 7 years 4.16 PV Factor of 15% for year 7 0.376 Annuity Factor of 15% for 10 years 5.019 PV Factor of 15% for year 10 0.247 Total Present value of operating Cost $ 6240 3011.4 Present Value of Salvage value $ 676.8 1235 Present value of machine at year 0 $ 6500 50000 Total Present value of out flows $ 12063 51776 Equivalent uniform annual cost $ 2900 10316

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