An existing machine can be kept if $1, 500 is spent now to update it for future

Question

An existing machine can be kept if $1, 500 is spent now to update it for future service requirements. Alternatively, the company can purchase a new machine to replace the old machine. 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 the information, should the existing machine be replaced right now? Assume the machine will be needed for an indefinite period of time. Using AW method, Challenger by $1, 027 Using AW method, Defender by $1, 572 Using AW method, Challenger by $1, 572 Using AW method, Defender by $1, 027

Explanation / Answer

(a) Defender

Initial Cost = Current MV + Required Upgrade = $(35,000 + 1,500) = $36,500

AW ($) = 36,500 x A/P(20%, 6 years) + 1,200 + 1,000 x P/F(20%, 6 years)

= 36,500 x 0.3 + 1,200 + 1,000 x 0.33

= 10,950 + 1,200 + 330

= 12,480

Challenger

Initial cost = Purchase price + Installation Cost

= $(50,000 + 5,000) = $55,000

AW ($) = 55,000 x A/P(20%, 10 years) + 1,000 - 7,000 x P/F(20%, 10 years)

= 55,000 x 0.25 + 1,000 - 7,000 x 0.16

= 13,750 + 1,000 - 1,120

= 13,550

AW of Challenger is higher than AW of Defender by $(13,550 - 12,480) = $1,070. Therefore, existing machine (Defender) should not be replaced right now.

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