A machine is being studied for replacement The machine could be sold for $6000 n

Question

A machine is being studied for replacement The machine could be sold for $6000 now or kept for at most another 2 years. If kept, if Mill cost $16.000 to operate in the first year and $20.000 in the second. If retired after 1 more year, the machine could be sold for $2500. If kept 2 years. the scrap value is around $100. The replacement machine can be purchased for $20.000 and is expected to last up to 3 years. Operating cost in the first year is $11.000 This cost is expected to grow to 13.000 in year 2 and 19.000 in year 3. The new machine's value after 1 year is 12.000. after 2 is 6000, and after 3 is zero. Using an MARR of 10%, determine and report the economic justification for keeping the old machine or buying the new machine and identify the best economic decision.

Explanation / Answer

This is a case of estimating PV and there are options as below

1. Sell old machine now.

Hence costs are 20000 to buy new machine, 11000 operation cost, both at starting. Received are 6000 for selling old one and 6000 for selling new machine at end of 2 yrs.

Hence PV = 6000-20000-11000-13000/1.1^2+(6000/1.1^3) = -31236.

2. If old machine sold after 1 year,

PV = -16000+2500/(1+.1)-20000/1.1-11000/1.1-13000/1.1^2+6000/1.1^3 = -48145.

3. If old machine is retained,

PV = -16000-20000/1.1 = -34182.

Hence on observation, option provides the best PV where old machine is sold immediately.

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