Question

A
machine for refining operation was purchased 7 years ago for
160,000 SAR. Last year a replacement study was performed with the
decision to retain it for 3 more years. The situation has changed .
The equipment is estimated to have a value of 8,000 SAR now or
anytime in the future. If kept in service, it can be minimally
upgraded at a cost of 43,000 SAR which will make it usable for up
to 2 more years. Its operating cost is expected to be 22,000 SAR
the first year and 25,000 SAR the second year.

Alternatively, the company can purchase a new system that will have
an equivalent annual worth of 47,063 SAR per year over its ESL. The
company uses a MARR of 10% per year. Calculate the relavent annual
worth values, and determine when the company should repalce the
machine.

Answer #1

**Given
values:**

*Existing
Machine*

Present worth = SAR 8000

Upgrade cost = SAR 43000

Life = n = 2 years

Operating cost = SAR 22000 (Year 01) & SAR 25000 (Year 02)

*New
System*

Net Annual worth = SAR 47063

MARR = 10%

**Solution:**

**1.Let us estimate the net
annual worth for the existing machine**

Net Annual worth = [8000 + 43000] (A/P,10,2) + [22000(P/F,10,1) + 25000(P/F,10,2)]( A/P,10,2)

Using DCIF tables

Net Annual worth = (8000 + 43000) (0.5762) + (22000(0.9091) + 25000(0.8264))( 0.5762)

**Net Annual worth = SAR
52814.60**

**2. From the above
calculation it is clear that the existing machine should not be
replaced in second year. Therefore the machine should be replaced
immediately to avoid the excess cost.**

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