Question

Replacement Analysis BTCF Machine A was purchased three years ago for $12,000 and had an estimated market value of $1,000 at the end of its 10-year life. Annual operating costs are $1,500. The machine will perform satisfactorily for the next seven years. A salesman for another company is offering machine B for $60,000 with a market value of $5,000 after 10 years. Annual operating costs will be $800. Machine A could be sold now for $8,000, and the MARR is 6% per year. (15ptos) a. Using the outsider viewpoint, what is the equivalent annual cost of continuing to use Machine A? b. Using the outsider viewpoint, what is the equivalent annual cost of buying Machine B? c. Should Machine A be replaced with Machine B? Don't Use Excel! Please

Answer 1

Answer:

a.

For Machine A

Year	Cost	Present value(PV)
0	8000	8000
1	1500	1415
2	1500	1335
3	1500	1259
4	1500	1188
5	1500	1121
6	1500	1057
7	1500	998
7	1000(salvage value)	-665
Total		15708

Equivalent Annual cost=(NPV*r)/[1-(1+r)-n]

=(15708*0.06)/[1-(1+0.06)-7]=942/[1-0.665]=942/0.335=2812(approx.)

b.

For Machine B

Year	Cost	Present value(PV)
0	60000	60000
1	800	746
2	800	712
3	800	672
4	800	634
5	800	598
6	800	564
7	800	532
7	5000(salvage value)	-3325
Total		61133

Equivalent Annual cost=(NPV*r)/[1-(1+r)-n]

=(61133*0.06)/[1-(1+0.06)-7]=3668/[1-0.665]=3668/0.335=10950(approx.)

c.

Cost of Machine B is higher therefore it is not recommended to replace machinery A with machinery B.