A five-year-old defender has a current market value of $4,000 and expected O&M;

Question

A five-year-old defender has a current market value of $4,000 and expected O&M; costs of $3,000 this year, increasing by $1,500 per year. Future market values are expected to decline by $1,000 per year. The machine can be used for another three years. The challenger costs $6,000 and has O&M; costs of $2,000 per year, increasing by $1,000 per year. The machine will be needed for only three years, and the salvage value at the end of that time is expected to be $2,000. The MARR is 15%. Determine the annual cash flows for retaining the old machine for three years. Determine whether now is the time to replace the old machine. First show the annual cash flows for the challenger.

Explanation / Answer

Answer a)

-$2,000

AECc(15%) = [$6,000 + $1,000(P/F, 15%, 2)] (A/P, 15%, 3) + $2,000

= $4,959.04

AECD(15%) = [$4,000 + $3,000(P/F15%, 1) + $4,500(P/F, 15%, 2)+ $5,000(P/F, 15%, 3)] (A/P, 15%, 3)

= $5,824.62

b) Now is the time to replace the defender

n Defender Challenger 0 -$4,000 -$6,000 1 -$3,000 -$2,000 2 -$4,500 -$3,000 3 -$5,000

-$2,000

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