A small paint company owns an air compressor that should possibly be replaced. A
ID: 2648363 • Letter: A
Question
A small paint company owns an air compressor that should possibly be replaced. A new model which sells for doller 1500 will last 7 years with annual costs estimated to be doller 100 the first year and increasing doller 50 each year thereafter, and a zero salvage value. The old compressor can be sold al the following prices: doller 400 now, doller 30U next year, or SSO the following year. The company will keep the compressor for a maximum of two more years since the operating expenses are expected to increase to doller 175 next year and doller 350 the following year. When should the company buy the new compressor, assuming all cost projections remain as estimated now. The investment rate is 12% per year.Explanation / Answer
Net Cost of Air compressor after considering
the aforesaid assumptions
The Company should buy the compressor in the FIRST year. The analysis is based on the below assumptions:
In Year 0:
Cost of the New air compressor : ($1500)
Add: Sale proceeds from sale of
Old compressor : $400
Net Cost of the air compressor : ($1100)
In Year1:
Cost of the new air compressor
(Assumed to be same as Year 0) : ($1500)
Add: Sale proceeds from sale of
Old compressor : $300
Add: Investment @12% for $1500 :$180 (1500@12%)
(If invested for 1 year)
Subtract: Operating expenses : ($175)
for old compressor
Net Cost of the air
Compressor in Year 1 : ($1195)
Present Value for
Net Cost of the air
Compressor in Year 0 : ($1067)
In Year2:
Cost of the new air compressor
(Assumed to be same as Year 0) : ($1500)
Add: Sale proceeds from sale of
Old compressor : $50
Add: Investment @12% for $1500 :$381.6 (1500@12% for 2 years)
(If invested for 2 year)
Subtract: Operating expenses : ($350)
for old compressor
Net Cost of the air
Compressor in Year 2 : ($1418.4)
Present Value for
Net Cost of the air
Compressor in Year 0 : ($1130.74)
Analysis & Cost assumptions Year 0 Year 1 Year 2Net Cost of Air compressor after considering
the aforesaid assumptions
$1195 $1067 $1130.74Related Questions
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