A manufacturer is considering replacing a production machine tool. The new machi
ID: 1091023 • Letter: A
Question
A manufacturer is considering replacing a production machine tool. The new machine, costing $37,000, would have a life of 4 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 4 more years and will have no salvage value. It could be sold now for $ l 0,000 cash. Assume that money is worth 8% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.
No
Can not decide
Yes
Need more information
A.No
B.Can not decide
C.Yes
D.Need more information
Explanation / Answer
Suppose the machine is replaced..
salvage value of old machine = $10,000
Cost of new machine = $37,000
Effective inital cost = 37,000-10,000 = $27,000
total direct + indirect labor cost saving = 5000+2000 =$7000
PW of the replacement = -27000+(7000/1.08^1)+(7000/1.08^2)+(7000/1.08^3)+(7000/1.08^4) = -$-3815.11
Negative present worth, it should not consider replacing the project.
(Option A)
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