Question

A chemical mixer was purchased 8 years ago for $100,000. If retained, it will require an investment of $50,000 to upgrade it; if upgraded, it will cost $35,000/year to operate and maintain (O&M) and will have a negligible salvage value after 5 years. A new mixer can be purchased for $120,000; it will have an annual O&M cost of $15,000 and a salvage value of $40,000 after 5 years. Alternatively, a mixer can be leased with 5 beginning-of-year lease payments of $20,000; O&M costs will be $ 18,000/year. If the mixer is replaced, the old mixer can be sold on the used equipment market for $15,000. The MARR is 10%. Using an insider’s approach, what are:

a) the EUAC of keeping the current mixer

b) the EUAC of replacing with a new mixer

c) the EUAC of replacing with a leased mixer

Answer 1