Question

A company is considering replacing a machine that was bought six years ago for ?$52,000. The? machine, however, can be repaired and its life extended five more years. If the current machine is? replaced, the new machine will cost ?$44,000 and will reduce the operating expenses by ?$6,300 per year. The seller of the new machine has offered a? trade-in allowance of ?$14,700 for the old machine. If MARR is 6?% per year before? taxes, how much can the company spend to repair the existing? machine?

Answer 1

Through repairs, life of current machine can be extended by 5 years.

Cost of new machine = $44,000

Trade-in allowance = $14,700

Net cost of new machine = $44,000 - $14,700 = $29,300

Reduction in operating expense per year due to new machine = $6,300

This reduction in operating expenses is a benefit of purchasing new machine.

Calculate the present worth of this benefit for five years -

PW = $6,300(P/A, 6%, 5)

PW = $6,300 * 4.2124 = $26,538.12

Calculate the amount that company can spend to repair the existing machine -

Amount = Net cost of new machine - PW of benefit from new machine

Amount = $29,300 - $26,538.12 = $2,761.88

The company can spend $2,761.88 to repair the existing machine.