A company is considering replacing a painting machine purchased 9 years ago for

Question

A company is considering replacing a painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M; costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Analyze this using an EUAC measure and a MARR of 20% to perform a before-tax analysis to see if the painting machine should be replaced if the old painting machine is taken in as a trade-in for its market value of $40,000. Use the cash flow approach (insider's viewpoint approach). Use the opportunity cost approach (outsider's viewpoint approach).

Explanation / Answer

Initial investment required= 800000-40000=760,000$

Cash Flow approach

oppurtunity cost approach

Year Cash flow Disc @ 20% DSCF 0 -760000 1 -760000 1 to 10 -120000 4.192 -503040 10 100000 0.162 16200 NPV -1246840

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