Question

Air Links, a commuter airline company, is considering the replacement of one of its baggage loading-unloading machines with a newer and more efficient one. The relevant details for both machines are as follows:

• The current book value of the old machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000.
• The new baggage-handling machine has a purchase price of $120,000 and an estimated useful life of seven years. It has an estimated salvage value of $30,000 and is expected to realize economic savings on electric-power usage, labor, and repair costs and to reduce the amount of damaged luggage. In total, annual savings of $50,000 will be realized if the new machine is installed.

The firm uses a MARR of 15%. Use Annual Worth Method, address the following questions:

1. What is the initial investment required for the new machine?
2. What are the cash flows for the defender in years zero to five?
3. Should the airline purchase the new machine?

Answer 1

Answer :-

A):- The new baggage-handling machine has a price tag of $120,000.

So, the initial cash outlay required for the new machine = $120,000.

B):- The current book value of the old machine(defender) is $50,000.The salvage value toward the finish of five years is zero, however the organization can offer the machine now to another firm in the business for $10,000.

Hence, the cash flows for the defender:

Year 0 = -$10,000 ; Years 1-5 = 0

C):- Annual equivalent (15%)D = - $10,000(A/P, 15%, 5)

= -$2,983

Annual equivalent (15%)C = - [($120,000 - $30,000) (A/P, 15%, 7) + $30,000(0.15)]+ $50,000 = $23,868

Subsequently, the airline should purchase the new machine because it has a higher annual equivalent cash flow.

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