My company is considering replacing a High Speed Encapsulation Machine that was

Question

My company is considering replacing a High Speed Encapsulation Machine that was bought 6 years ago for $50,000. The machine, however, can be repaired by in house maintenance staff and have its life extended by 5 additional years. If the current machine is replaced, the new machine will cost $44,000 and will reduce the operating expenses by $6,000 per year. The selling company of the new machine has offered a trade in allowance of $15,000 for the old machine. If MARR is 12% per year before taxes, how much can the company spend to repair the existing machine?

Explanation / Answer

Company can spend an amount upto the cost increase by the new machine:

cost of new machine $44000

Salvage of old machine ($15000)

Net cost of new machine $29000

annual saving for 5 years = 6000* present value of interst factor annuity(12%,5)

= 6000 * 3.60

= $21600

Net extra cost for new machine = $29000- 21600 = $7400

So, the company can spend $7400 to repair old machine.

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