An engineer calculated the AW values shown for retaining a presently owned machi

Question

An engineer calculated the AW values shown for retaining a presently owned machine additional years.

A challenger has an ESL of 7 years with AW = $$-86,000 per year.

1) Assuming all future costs remain the same, when should the company replace the defender?

The MARR is 12% per year. Assume used machines like the one presently owned will always be available.

2) Assuming all future costs remain the same, when should the company purchase the Challenger?

AW of AW of the Years Retained Defender, Challenger, 1 2 3 4 5 -145,000 -136,000 -96,000126,000 63,000 -92,000 39,00053,000 -49,000-38,000

Explanation / Answer

1) The company should replace the defender after Year 3 because the costs are falling till year 3, after which they are increasing, thereby creating a loss for the company

2) The company should replace the challenger after Year 5 because costs of the challenger are falling till the fifth year.

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