Question

A company owns a 5-year old turret lathe that has a book value of $25,000. The present market value for the lathe is $16,000. The expected decline in market value is $2,000/year to a minimum market value of $4000. maintenance plus operating costs for the lathe equal $4,200/year. A new turret lathe can be purchased for $45,000 and will have an expected life of 8 years. The market value for the turret lathe is expected to equal $45,000(0.70)k at the end of year k. Annual maintenance and operating cost is expected to equal $1,600.

Based on a 12% before-tax MARR, should the old lathe be replaced now? Use an equivalent uniform annual cost comparison, a planning horizon of 7 years, and the cash flow approach.

Answer 1

old lathe should not be replaced now

Step-by-step explanation:

Using MARR of 12%

Price decline of 2000 per year ; salvage value = (present market value - does cline per year)

Present market value of old lathe = $16000

Opening market value at year end = (16000 * 1.12) = 17920

Add: Maintainace plus operating cost = $4200 / year

Salvage value = 16000 - 2000 = 14000

Annual cost : (Opening market value + operating cost - salvage value)

Annual cost :

Year 1 = (17920 + 4200 - 14000) = 8120

Year 2:

Opening market value at year end = (14000 * 1.12) = 15680

Salvage value = (14000 - 2000) = 12000

Annual cost :

Year 1 = (15680 + 4200 - 12000) = 7880

Year 3:

Opening market value at year end = (12000 * 1.12) = 13440

Salvage value = (12000 - 2000) = 10000

Annual cost :

Year 1 = (13440 + 4200 - 10000) = 7640

Year 4:

Opening market value at year end = (10000 * 1.12) = 11200

Salvage value = (10000 - 2000) = 8000

Annual cost :

Year 1 = (11200 + 4200 - 8000) = 7400

New machine :

Opening market value of year end = (45000 * 1.12) = 50,400

Add : Maintenance plus Operating expense = $1600

Salvage value = 45000 * 0.7 = 31500

Annual cost :

50400 + 1600 - 31500

= 20500

New machine has a far greater annual cost thb the old, hence the old machine should still be used for now.