Question

# Replacement Analysis BTCF Machine A was purchased three years ago for \$12,000 and had an estimated...

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

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.