Five years ago, Thomas Martin installed production machinery that had a first co

Question

Five years ago, Thomas Martin installed production machinery that had a first cost of $25,000. At that time initial yearly costs were estimated at $1,250, increasing by $500 each year. The market value of this machinery each year would be 90% of the previous year's value. There is a new machine available now that has a first cost of $27,900 and no yearly costs over its five-year minimum cost life. If Thomas Martin uses an 8% before-tax MARR, when, if at all, should he replace the existing machinery with the new unit?

Explanation / Answer

Statement showing market value of old machine today and the expected annual charges

Statement showing NPV

Thus he should replace the machine

Year Value of machine Annaul cost 1 22500 1250 2 20250 1750 3 18225 2250 4 16403 2750 5 14762 3250 6 3750 7 4250 8 4750 9 5250 10 5750

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