Question

"Jacobson Inc. is considering replacing one of its CNC machines with one that is newer and more efficient. The firm purchased the CNC machine 9 years ago at a cost of $137,000. The machine had an expected economic life of 13 years at the time of purchase and an expected salvage value of $14,000 at the end of the 13 years. The original salvage estimate is still good, and the machine has a remaining useful life of 4 years. The firm can sell this old machine now to another firm in the industry for $32,000. The new machine can be purchased for $150,000, including installation costs. It has an estimated useful (economic) life of 8 years. The new machine is expected to reduce cash operating expenses by $27,000 per year over its 8 year life, at the end of which the machine is estimated to be worth only $7,000. The company has a MARR of 12%. What is the annual equivalent cost of the preferred alternative? Include the cost savings of the new machine as revenue for the new machine. Ignore the effect of taxes and depreciation."

Answer 1

Cost of new machine	-150000
Less:Salvage of existing m/c	32000
Add: PV of salvage lost ,4 yrs.from now(14000*0.63552)--P/F,4 th yr. 12%	-8897.28
Less: PV of reduction in cash opg. Costs(27000*4.96764)--P/A,8 yrs.12%	134126.3
Less: PV of salvage of new m/c(7000*0.40388)   -----------P/F, 8th Yr.12%	2827.16
NPV of Replacement	10056.16
Annuity Factor	(1-1.12^-8)/0.12=
	4.96764
Annual equivalent cost of the new m/c(NPV/Annuity Factor)	2024.33