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.

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