Question

A piece of equipment was purchased 2 years ago by Toshiba Imaging for $50,000 was expected to have a useful life of 5 years with a $5,000 salvage value. Its performance was less than expected, and it was upgraded for $20,000 one year ago. Increased demand now requires that the equipment be upgraded again for another $17,000 so that it can be used for 3 more years. If upgraded, its annual operation cost will be $27,000 and it will have a $12,000 salvage value after 3 years. Alternative it can be replaced with a new equipment priced at $65,000 with operating cost of $14,000 per year and a salvage value of $23,000 after 6 years. If replaced now the existing equipment will be sold for $7000. Should the existing equipment be replaced? Use a MARR = 10%

Answer 1

The cost incurred in buying the equipment and upgrading it before today are sunk cost and would not be considered for analysis

MARR = 10%

Upgrade option

Initial cost = 17000

Annual cost = 27000

Salvage value = 12000 after 3 years

Annual worth = -17000 (A/P, 10%,3) - 27000 + 12000 *(A/F, 10%,3)

= -17000*0.4021148 - 27000 + 12000 * 0.3021148

= -30,210.57

New equipment

Initial cost = 65000

Annual cost = 14000

Salvage value = 23000 after 6 years

Sale of old equipment = 7000

final cost after sale of old equipment = Initial cost - sale = 65000 - 7000 = 58000

Annual worth = -58000 (A/P, 10%,6) - 14000 + 23000 *(A/F, 10%,6)

= -58000*0.2296073 - 14000 + 23000*0.12960738

= -24336.25

Firm should replace the equipment as new equipment has lower annual cost