As a consultant you are asked to look at the following data to make a decision a

Question

As a consultant you are asked to look at the following data to make a decision about when to replace the machine.

Year

Defender Marginal Cost

Challenger EUAC

1

$13,250

$17,750

2

$14,600

$16,560

3

$15,950

$15,810

4

$17,300

$15,520

5

$18,650

$15,430

6

$15,450

7

$15,580

How many years would you keep the defender?

Show your method, approach, calculations to the best of your ability

Year

Defender Marginal Cost

Challenger EUAC

1

$13,250

$17,750

2

$14,600

$16,560

3

$15,950

$15,810

4

$17,300

$15,520

5

$18,650

$15,430

6

$15,450

7

$15,580

Explanation / Answer

Defender machine should be kept for the year 1 and year 2 (for 2 years) as it gives cost savings in comparison to the challenger machine. From year 3 onwards, the challenger machines is more cost effective in comparison to the defender machine. Hence, after the year 2 , defender machine should be replaced.

Year Defender Marginal Cost Challenger EUAC Incremental cost saving by defender over challenger 1 $13,250 $17,750 $4,500 2 $14,600 $16,560 $1,960 3 $15,950 $15,810 -$140 4 $17,300 $15,520 -$1,780 5 $18,650 $15,430 -$3,220 6 $15,450 7 $15,580

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