1. (20 pts.) A company wants to determine whether to keep or replace a piece of
ID: 1157906 • Letter: 1
Question
1. (20 pts.) A company wants to determine whether to keep or replace a piece of manufacturing equipment. The details for the two options are: Old Equipment: Requires overhaul to continue using, at a cost of $20,000. If overhauled, operating and maintenance costs Selling the equipment now will provide $60,000 in revenue. will be $25,000 per year and the salvage value after 7 years is $0. New Equipment: The new equipment will have maintenance and operating costs of $12,000 per year, and the salvage value after 7 years will be $35,000. If the MARR = 15%, what is the maximum cost of the new equipment for which the would choose to replace the old equipment? companyExplanation / Answer
Option-1 Overhaul of old machine: Overhauling cost (25000-12000) -20000 Annual operating expense -25000 Annuity factor f or 7 yrs at 15% 4.1604 Present value of Operating expense -104010 Total Present worth -124010 option-2 New purchase Annual operating cot -12000 Annuity factorf or 7 yrs 4.1604 Present value of Ooperating expense -49924.8 Less: Salvage value of old machine 60000 Less: Present value of new machine salvage 12526.5 (35000*0.3759) 22601.7 Net present worth excluding Initial investmentt Therefore, to opt for replacing the old machinery, The Price of new machinerey shall be less than $ 146612 (124010+22602)
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