Question

# The Wu Lighting Company is considering replacing an old, relatively inefficient vertical drill machine that was...

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

 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.

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