Must show work to get points! Pace Corporation in Cookeville, Tennessee bought p
ID: 1100625 • Letter: M
Question
Must show work to get points!
Pace Corporation in Cookeville, Tennessee bought production equipment 2 years ago for $38,000. The equipment was expected to last for 5 years and the salvage value was estimated to be $4,000 at the end of its useful life. Unfortunately, the equipment did not perform satisfactorily and the company spent $15,000 a year ago. It is recommended by the plant engineer that the equipment be either upgraded now for another $12,000 or replaced with equipment now. If the equipment is replaced now, it can be sold for $8,000. In conducting a replacement analysis, the cost of the defender to be used is equal to ________________.
Explanation / Answer
Let us assume that the equipment is kept. Over these 5 years we will calculate the amount the company has spent over it.
$12,000+$15,000=$27,000
this will be later sold for$4,000. Net outflows =$27,000-$4,000= $23,000
Suppose the equipment is to be sold right away cost = $12,000 + $38,000 (as they need an equipment in place of the older one)
=$40,000
Salvage value = $8,000+$4,000 (salvage value of current equipment + salvage value of replacement equipment)
=$12,000
Net Outflow=$40,000-$10,000=$28,000
Now since the MARR is not given let us assume MARR = 10%, Applying MARR = 10% for both cases, we get that the figure at $27,000 for the defender.
Option A
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