An asset purchased three years ago for $120,000 can be replaced by a new type of
ID: 2453540 • Letter: A
Question
An asset purchased three years ago for $120,000 can be replaced by a new type of equipment. The market value of the old equipment is currently $54000. Its market value is expected to be $40000 and $20000 one year and 2 years from now, respectively. Its operating cost was $18,000 for the first 3 equipment that can be purchased for $138,000 will have an economic service life of 5 years, an operating cost of $9000 per year, and a salvage value of $32000 after 5 years. Determine if the presently owned machine should be replaced now, 1 year from now or 2 years from now. Assume i =10%. SHOW ALL YOUR WORK PLEASE NOT USING SPREADSHEET.
Explanation / Answer
Statement Showing evaluation of replacement proposal
It is recommended that equipment should be replaced Now.
Particulars Now After 1 year after 2year Purchase cost of new Machine $138000 $138000 $138000 Less: Market Value of old Machine ($54000) ($40000) ($20000) Net Cash outflow $84000 $98000 $118000 Cost savings ($18000-$9000) $9000 $9000 $9000 PVAF 2.487 1.736 0.909 P.V. of cost savings -B 22383 15624 8181 P.V.C.O 61617 82376 109819 Equivalent annual PVCO 24775.63 47451.61 120812.98Related Questions
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