Answer:
<u>For retaining of Old Machine Equipment</u>
Price of old equipment 3 yrs ago = $130,000
O & M cost per year = $35,000
Using the Cash flow approach
End of year Cash flow 1 Old equipment
0 $0 Initial Cash flow
1 -$35,000 O & M cost per year
2 -$35,000 O & M cost per year
3 -$35,000 O & M cost per year
4 -$35,000 O & M cost per year
5 -$35,000 O & M cost per year
Hence, Annual worth = Initial cash flow + Annual cost
Annual worth = 0 - $35,000
Annual worth = -$35,000
<u>For buying of new equipment</u>
Cost of buying new crane = $150,000
Market value of old crane = $40,000
Time = 5 years
O & M cost per year = $8,000
Salvage value = $55,000
MARR = 20%
Using the Cash flow approach
End of year Cash flow 1 New equipment
0 $110,000 -$150,000 + $40,000
1 -$8,000 O & M cost per year
2 -$8,000 O & M cost per year
3 -$8,000 O & M cost per year
4 -$8,000 O & M cost per year
5 $47,000 -$8,000 + $55,000
Annual worth = Initial cash flow + Annual cost + Salvage value
Annual worth = -$110,000(A/P 20%,5) - $8,000 + $55,000(A/P 20%,5)
Annual worth = -$110,000*(0.334) - $8,000 + $55,000*(0.134)
Annual worth = -$36,781.77 - $8,000 + $7,390.88
Annual worth = -$37,908.88
Conclusion: We should retain the old machine as it is more favorable than purchase of new equipment
