Question

6 (12 pt) An in place machine has an equivalent annual worth of $-20000 for each year of its maximum remaining useful life of two years. A suitable replacement is determined to have equivalent annual worth values of $-35000, $-25000, and $-30000 per year if kept for 1,2, or 3 years, respectively. When should the company replace the machine, if it uses a fixed 3-year planning horizon? Use an interest rate of 17.255609824% per year compounded semiannually.

Answer 1

Year	Defender	Challenger	Minimum Cost
1	- $ 20,000	- $ 35,000	Defender
2	- $ 20,000	- $ 25,000	Defender
3		- $ 30,000	Challenger

As it is given in the question the AW of Defender in 2 years is -$ 20,000 while in case of challenger in both years the cost is higher than Defender thus select Defender in years 1 and 2, In year 3 replace it with challenger.

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