An existing robot can be kept if $2,100 is spent now to upgrade it for future se

Question

An existing robot can be kept if $2,100 is spent now to upgrade it for future service requirements. Alternatively, the company can purchase a new robot to replace the old robot. The following estimates have been developed for both the defender and the challenger. The company's before-tax MARR is 18% per year. Based on this information, should the existing robot be replaced right now? Assume the robot will be needed for an indefinite period of time. The AW value of the defender is $ (Round to the nearest dollar.) The AW value of the challenger is $ (Round to the nearest dollar.) The existing robot be replaced right now.

Explanation / Answer

The reasonable rate, called the minimum attractive rate of return (MARR), must be higher than the cost of money used to nance the alternative, as well as higher than the rate that would be expected from a bank or safe (minimal risk) investment. For a corporation, the MARR is always set above its cost of capital, that is, the interest rate a company must pay for capital funds needed to nance projects.

a)AW of defender = PMT(18,6,38000,1400)-1500 = -685,500.0151

b)AW of Challenger = PMT(18,9,51000,-7000) – 1100 = -919,100

c) the existing robot should not be replaced right now

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