Question

Aj has a piece of test equipment that it is considering replacing. The instrument has
a current salvage value of $50,000. The existing test equipment is expected to have a salvage value of
$40,000 in one year. The cost of lower productivity of the existing test equipment is now $30,000. A
new test system has a first cost of $120,000 and has the following salvage values and loss of productivity
for each of the next four years. Aj MARR is 15%. What is the cost advantage of the best test
system.

Answer 1

We have 2 option:

1. Retain the existing Equipment & do some work on this and use this equipment.

2. Buy a new one

in the first option our present outflow will be:

Cost of Lower Productivity treatment: 30000

Present Value of Salvage: Salvage Value / 1+MRR = 40000/1+15%= 40000/1.15=34782.61

so total present value of net outflow will be =34782.61-30000=4782.61

in the second option net out flow will be:

Cost of New Equipment= 120000

Less: Sale value of Existing Equipment = 50000

So Net Out flow will be: 120000-50000= 70000

So, as per given information it is better to use Existing Equipment.

Opinion: but as per my understanding there is some information missing for the New Equipment , only Life is given .