Bruin Manufacturing is evaluating whether it should retain its current environme
ID: 1095380 • Letter: B
Question
Bruin Manufacturing is evaluating whether it should retain its current environmental test chamber and room or sell it immediately and purchase a new one. The relevant costs are shown below. The current one can be kept for another 5 years, given that an additional maintenance cost of $500 each year is provided each year.
Determine whether the current equipment should be replaced. Use a before-tax MARR of 13% per year and the
annual cost method.
Defender
Challenger
Capital investment, $ 3 years ago
33,000
0
Capital investment
0
38,000
Annual operating expenses
5,250
5,450
Annual maintenance
500
0
Current market value
13,000
0
Estimated salvage value at the end of 5 additional years
1,500
23,000
Defender
Challenger
Capital investment, $ 3 years ago
33,000
0
Capital investment
0
38,000
Annual operating expenses
5,250
5,450
Annual maintenance
500
0
Current market value
13,000
0
Estimated salvage value at the end of 5 additional years
1,500
23,000
Explanation / Answer
NPV of defender
= -33000 * (1+0.13)^3 - 5750 * [1-(1.13)^-5]/0.13 + 1500/1.13^5
- 67025.54
NPV of challenger
= -38000 -5450 * [1-(1.13)^-5]/0.13 + 23000/1.13^5
= 44685.43
hence should choose new equipment
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