Question

(a) ABC Company purchased a $20,000desk-top laser cutting machine 1year ago.  The company was expected it can last for 5years and a salvage value of $5,000.  Since it was accidentally dropped on the floor last year, $3,000was paid for repairs, and its current operating costs are running at the rate of $4,000 annually. It is expected to be increased $1,000more from the next year onwards.  Recently, the company has found that it has a market value of $8,000in second-hand market.  At the same time, another equipment vendor, XYZ, invites the company to trade-in as $4,000discount for a new but similar one which is priced as $23,000.

If ABC Company wants to replace the machine now, list out ALLthe 10 underlined values above, and determine each whether is relevant or irrelevant to their replacement analysis.  Justify your answer.

(b) Referring to part (a), if the management reconsiders extending the original disposal date of the laser cutting machine for 1 more year, and just getting a new lower salvage value of $4,800.  On the other hand, XYZ’s new machine will have operating costs of $5,500, useful life span last for 5 years, and a salvage value of $3,800.  Determine the preferred alternative if MARR is 5% per year.

*Please go for part B only

*If there required calculations, please give me the whole steps

* That the whole question and all information I have.

THANK YOU

Answer 1

In the given situation there are two alternatives :

1) either to continue the old machine with extended one year and get a lower salvage value of 4800

2) purchase a new machine now  

For alternative 1 the working is as follows :

New value as on today of existing machine = (20000-5000)/5 = 3000

[200000-3000+ 30000(repairs)] = 20000

Depreciation = (20000-4800)/ 5 = 3040

Annual Operating cost = 4000+1000 =5000

Total = 8040

For alternative 2

Deprecittion [(23000-4000) - 3800]/5 = 3040

Anuual operating cost = 5500

Total cost = 8540

Hence it is advisable to continue with the exisitng machine i.e. Alernaive 1