An asset purchased three years ago for $20,000 can be replaced by a new type of

Question

An asset purchased three years ago for $20,000 can be replaced by a new type of equipment. The market value of the old machine is currently $13,000 and will be $9,000, $8,000, $6,000, $2,000, and $0 at the end of each of the next five years. The annual operating costs (AOC) for each of the next five years will be $2,500, $2,700, $3,000, $3,500, and $4,500. How much longer should the defender be kept, if the MARR is 10%?

Keep it for four more years

Keep it for three more years

Replace it this year

Replace it next year

Keep it for four more years

Keep it for three more years

Replace it this year

Replace it next year

Explanation / Answer

we will calculate the present value of cash flows for this analysis

if machine is replaced this year

then Net cash flows wil be 13000 - 20000*(1+0.1)^3

if machine is replaced after 3 yrs

then net cash flows 2000/(1+0.1)^3 -2500/(1.1) -2700/1.1^2 -3000/1.1^3 -20000*(1.1)^3

as we can see as yrs passes there is decrease in market value of old machine and increase in operating cost in machine so in present cash flows possitive value (market value of old machine) is decreasing and negative value (operating cost) are increasing ..

hence machine should be replaced this year only

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