An existing robot can be kept if $2,300 is spent now to upgrade it for future se

Question

An existing robot can be kept if $2,300 is spent now to upgrade it for future service requirements. Alternatively, the company can purchase a new robot to replace the old robot. The following estimates have been developed for both the defender and the challenger. The company?s before-tax MARR is 20% per year. Based on this information, should the existing robot be replaced right now? Assume the robot will be needed for an indefinite period of time. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 20% per year. The AW value of the defender is $. (Round to the nearest dollar.)

Explanation / Answer

Working note:

1. Current MV = Purchase price

2. MV at end of useful life = Salvage value

3. For Defender, Initial investment = Current MV + Required upgrade = $(36,000 + 2,300) = $38,300

4. For Challenger, Initial investment = Purchase price + Installation cost = $(53,000 + 5,400) = $58,400

(a) Defender

AW ($) = 38,300 x A/P(20%, 5 years) + 1,600 - 1,600 x P/F(20%, 5 years)

= 38,300 x 0.33 + 1,600 - 1,600 x 0.4

= 13,599

(b) Challenger

AW ($) = 58,400 x A/P(20%, 9 years) + 1,000 - 6,000 x P/F(20%, 9 years)

= 58,400 x 0.25 + 1,000 - 6,000 x 0.19

= 14,460

Since AW of Defender < AW of Challenger, existing robot (Defender) should not be replaced right now.

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