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.