2) A manufacturer is considering the replacement of one of its machines with a n

Question

2) A manufacturer is considering the replacement of one of its machines with a newer and more efficient one. The relevant details for both the defender and the challenger are as follows: The current book value of the old machine is $60,000, and it has a remaining useful life of 5 years. The salvage value expected from scrapping the old machine at the end of 5 years is O, but the company can sell the machine now to another firm for $13,000. A new machine can be purchased at a price of $144,000 and has an estimated useful life of years. It has an estimated salvage value of $40,000 and is expected to realize economic savings on power usage, labor and repair costs. In total, annual savings of $60,000 will be realized if the new machine is installed The firm uses a MARR of 15%, using the opportunity-cost approach: a) What is the initial cash outlay required for the new machine b) What are the cash flows for the defender in years 0-5 c) Should the firm purchase the new machine?

Explanation / Answer

a. Initial outlay required 144000 b. Cash flows for the defender in Years 0 to 5 PW in    Year 0 -13000 (Opportunity cost of keeping the old machine without selling) c. PW of the new machine= -144000+(60000*4.16042)+(40000*0.37594) 120663 PVOA F 15%,7 years= 4.16042 PV F 15%,7 yr.= 0.37594 As the PW of the new machine is positive, the firm should purchase the new machine

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