Question

Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. A machine working in that environment is deteriorating quickly and can be used for only one more year, at which time it will be scrapped with no salvage value. It was purchased 3 years ago for $88,000, and its operating cost for the next year is expected to be $51,000. A more corrosion-resistant challenger will cost $228,000 with an operating cost of $57,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 8% per year, what minimum replacement value would render the challenger attractive? The minimum replacement value that would render the challenger attractive is $

Answer 1

Let RV be the minimum resale value then annual worth of both should be equal as per the given condition in the question.

-RV(A/P,8%,1)-51000 = -228000(A/P,8%,10)-57000+60000(A/F,8%,10)

-RV(1.08)-51000 = -228000(0.149029)-57000+60000(0.069029)

-RV(1.08)-51000 = -33978.612-57000+4141.74

-RV(1.08)-51000 = -86836.872

-1.08RV = -86836.872+51000

-1.08RV = -35836.872

RV = 35836.872/1.08

The minimum replacement value that would render the challenger attractive is = $33182.28