nity to invest the $ 44,100 of additional funds required for the replacement in

Question

nity to invest the $ 44,100 of additional funds required for the replacement in a project that earns a return of $3 % ( assumed for illustration), the amount of the return over tve six- year period would be $ 7,938 ($44,100× 3%×6). however, this is less than the differential income determined in part(1), suggesting the proposal to replaces is still preferred

or by WRD FinMan 14e_ PR 24(10)-2B.xlsx Other factors to be considered include A Are there any improvements in the quality of work turned out by the new machine? from the old machine) that are required to purchase the new machine? This factors prove that the net cost reduction anticipated over the six-year period may not be sufficient to required for the differential income determined in part (1), suggesting the proposal to replace is still preferred the amount

Explanation / Answer

During the replacement analysis, opportunities available to use the fund other than buying the new machine also needs to be considered. If the opportunities available provide return higher than the savings from the new machine, then it doesnot make sense to invest in new machine for lower return. However, if the return provided by alternative opportunity is lower than the savings from the machine then new machine should be bought. Here, as calculated investing in fund have total savings of $7,938 whereas total savings from the buying new machine is higher than this over six years. Since buying new machine provide higher return, thereore the new machine should be preferred.

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