Question

1) A lumber company that cuts fine woods for cabinetry is evaluating whether it should retain the current bleaching system or replace it with a new one. The relevant costs for each system are known or estimated. Use an interest rate of 10% per year to (a) perform the replacement analysis and (b) determine the minimum resale price needed to make the challenger replacement choice now. Is this a reasonable amount to expect for the current system? Current New System System First cost 7 years ago, $ –450,000 First cost, $ –700,000 Remaining life, years 5 10 Current market value, $ 50,000 AOC, $ per year –160,000 –150,000 Future salvage, $ 0 50,000

Answer 1