2)What is the recommended course of action? 2. (30 points) A milling machine pur

Question

2)What is the recommended course of action?

2. (30 points) A milling machine purchased.by a machine tool company 12 years ago approximately $10,000. If the milling machine is sold now, the company can get will apply. A challenger will cost $130,000 and have a maximum lifé of 3 years. Its market -for $75,000 can be used for up to 2 more years but only if upgraded at a cost of 00. Otherwise the estimated market values and operating costs shown below value and operating cost estimates are shown below. The machine tool company uses an interest rate of 12%/year in its economic decision making. Existing Machine Tool Proposed Replacement AOC, / $/year |1-30,000 33,000 Market Year Value $ .9,000 AOC, S/year Market Value $ -52,0001 | 110,000 95,000 32,000 21--5:000 | -61,000 70,000

Explanation / Answer

Analysis for new machine Year O&M Cost Cost PVF at 12% PV Cumlative PV Market Value Market Value PW PW = Cumulative PV + Market value PW PVAF at 12% EUAC A B C D =A*C or B*C E F = C*E G H G÷H 0 ($130,000)                       1.00     (130,000.00)    (130,000.00)                        -                   -   1 -30000 0.892857143        (26,785.71)    (156,785.71)             110,000                 98,214.29     (58,571)    0.892857     (65,600) 2 -32000 0.797193878        (25,510.20)    (182,295.92)               95,000                 75,733.42 (106,563)    1.690051     (63,053) 3 -33000 0.711780248        (23,488.75)    (205,784.67)               70,000                 49,824.62 (155,960)    2.401831     (64,934) EUAC minimum = $63,053 Economic life = 2 years Analysis for old machine Year O&M Cost Cost PVF at 12% PV Cumlative PV Market Value Market Value PW PW = Cumulative PV + Market value PW PVAF at 12% EUAC A B C D =A*C or B*C E F = C*E G H G÷H 0 ($20,000)                       1.00        (20,000.00)       (20,000.00)                        -                   -   1 -52000 0.892857143        (46,428.57)       (66,428.57)                 9,000                    8,035.71     (58,393)    0.892857     (65,400) 2 -61000 0.797193878        (48,628.83)    (115,057.40)                 5,000                    3,985.97 (111,071)    1.690051     (65,721) Conclusion: Since EUAC for old machine is more than New machine , new machine should be purchased Cost : 20000, since 10000 Opportunity cost+10000 improvement cost

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