1. Lumberjack Power, operator of a nuclear plant, is planning to replace its cur

Question

1. Lumberjack Power, operator of a nuclear plant, is planning to replace its current equipment with some that is more environmental friendly. The old equipment has annual operating expenses of $6,750 and can be kept for 8 more years. The equipment will have a salvage value of $4,000, if sold 8 year from now, and has a current market value of $24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of $6,250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operating. If company

Explanation / Answer

We will look at both cases and see whic gives us a better value For both cases we use the find the following (annual operating expense =6750 salvage value sold in 8 years=4000 market value sold now=24000 new equip intial cost =62000 op expenses=6250 salvage value after 8 years=19000 interest 15% For the first case of keeping old equip we calculate as follows principal*(1+interest)^years operating expense 6750*(1.15)^8=20,648.40 salvage value=4000 If we keep our machine for 8 years it will be -20,648.40+4000=-16,648.40 for our cost If we decide to by a new machine we get operating expense of 6250*(1.15)^8=19118.89 salvage value of 19000 and value for selling old machine of 24000 we have -19,118.89+19000+24000=62,118.89 The firm should purchase the new equipment

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