Question

The Wu Lighting Company is considering replacing an old, relatively inefficient vertical drill machine that was purchased 7 years ago at a cost of $14,000. The machine had an original expected life of 12 years and no salvage value at the end of that period. The divisional manager reports that a new machine can be purchased. Over its five-year life, the new machine will expand sales from $11,000 to $19,000 a year and will reduce the usage of labor and raw materials sufficiently to cut annual operating costs from $8,000 to $2,000. The new machine has an estimated salvage value of $1,900 at the end of its five-year life. The old machine`s current market value is $1,900; the firm`s MARR is 18%. What price of the new machine will make the Wu Lighting Company indifferent between keeping the old machine and purchasing a new machine? Enter your answer as positive number. Hint: think of comparing the present worth of the two options

Answer 1

Present value of Cash inflows:
Annual Increase in Sales revenue					25017.6
($ 8000 * Annuity factor for 5 years i.e. 3.1272)
Annual Savings in labour cost					18763.2
($ 6000 *Annuity factor for 5 yrs i.e.3.1272)
Present value of Salvage Value of new machine					830.49
($ 1900* PVf for Year-5 i.e. 0.4371)
Salvage value realised of oldmachinery					1900
	Present value of inflows				46511
Hence, the price to be paid for new machine is $ 46511 to be indifferent.