A company that makes micro motion compact coriolis meters purchased a new packag

Question

A company that makes micro motion compact coriolis meters purchased a new packaging system for $600000. The estimated salvage value was $28000 after 10 years.Currently teh expescted remaining life is 7 years with an AOC of $27000 per year, and an estimated salvage value of $40000. The company is considering early replacement of the system with one that costs $370000 and has a 12 year economic service life, a $22000 salvage value, and an estimated AOC of $50000 per year. If the MARR is 12% per year, find the minimum trade in value necessary now to make the replacement economically advantageous.

Explanation / Answer

The first sentence is not useful since all of it is sunk cost.

Hence we consider the cases: continue the current machine or replace it.

For replacement to be advantageous, -105127.4579 <= -341071.86 + X. Hence, exchange value = X should be minimum $235.944.40 = answer

MARR 12% Cashflow Retaining the current one Replacement Year Present Value of $1 Cash flow PV of cash flow Cash flow 0 1 0 0 -37000 -37000+X 1 0.892857 -27000 -24107.14 -50000 -44642.85714 2 0.797194 -27000 -21524.23 -50000 -39859.69388 3 0.71178 -27000 -19218.07 -50000 -35589.01239 4 0.635518 -27000 -17158.99 -50000 -31775.90392 5 0.567427 -27000 -15320.53 -50000 -28371.34279 6 0.506631 -27000 -13679.04 -50000 -25331.55606 7 0.452349 13000 5880.54 -50000 -22617.46077 8 0.403883 -50000 -20194.1614 9 0.36061 -50000 -18030.50125 10 0.321973 -50000 -16098.66183 11 0.287476 -50000 -14373.8052 12 0.256675 -50000 -7186.902602 Net PV -105127.4579 =-341071.86 + X

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