Question

Kermit bought a production line 5 years ago for $35,000. At that time it was estimated to have a service life of 10 years and salvage at the end of its service life of $10,000. Kermit's CFO recently proposed to replace the old line with a modern line expected to last 15 years and cost $95,000. This new line will provide $7,000 savings in annual operating and maintenance costs, and have a salvage value of $15,000 at the end of 15 years. The seller of the new line is willing to accept the old line as a trade-in for its current fair market value, which is $12,000. The CFO estimates that if the old line is kept for 5 more years, its salvage value will be $6,000. We are looking at performing a replacement analysis. The defender must be analyzed using a first cost of ___________ and a salvage value of ____________ for __________ years. The challenger must be analyzed using a first cost of __________ and a salvage value of __________ for _________ years.

Answer 1

Answer: The defender must be analyzed using a first cost of _____$12,000______ and a salvage value of _____$6,000_______ for ____5______ years. The challenger must be analyzed using a first cost of ____$95,000______ and a salvage value of _____$15,000_____ for _____15____ years.

Explanation:

The defender would first be analyzed using the first cost of the machine which was $12,000 and it salvaged value of $6,000 for a periodic of 5years.

While the challenger would be analyzed using using a first cost of $95,000 and a salvaged value of $15,000 over a period of 15years.