company is examining the cost of some of its maintenance equipment. Its present
ID: 2560731 • Letter: C
Question
company is examining the cost of some of its maintenance equipment. Its present is costing $20,000 per year to operate, and an additional $5,000 expense is during the third year. The company estimates a salvage value of $3,500 after six years of operation. The equipment can be upgraded at a cost of $13,500 at time zero. After upgrade, operating costs are expected to be $17,000 per year, with no other costs. value after six years is expected to be $8,500. Determine if it is feasible to upgrade the equipment, assuming the minimum rate of return is 8% per year. Use NPV equipment expected Salvage and service life breakeven analysis.Explanation / Answer
Method NPV Pre Upgradation Year Cost to operate PVF @8% PV of Cost 1 20000 0.9259 18518.52 2 20000 0.8573 17146.78 3 25000 0.7938 19845.81 4 20000 0.7350 14700.60 5 20000 0.6806 13611.66 6 20000 0.6302 12603.39 Total Cost 96426.75 Less Slavage Value @6th Year 2205.70 (3500*0.6302) Net Cost of Operating 94221.05 Post Upgradation Year Cost to operate PVAF @8% PV of Cost 0 13500 1 13500.00 1-6 Years 17000 4.6229 78589.30 Total Cost 92089.30 Less Slavage Value @6th Year 5356.70 (8500*0.6302) Net Cost of Operating 86732.60 Hence Cost of operating is lower after the upgradation hence upgradtion is recomened
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