Question

The replacement of a planning machine is being considered by the Reardorn Furniture Company.​ (There is an indefinite future need for this type of​ machine.) The best challenger will cost ​$30 comma 00030,000 for installation and will have an estimated economic life of 1212 years and a ​$2 comma 0002,000 MV at that time. It is estimated that annual expenses will average ​$16 comma 00016,000 per year. The defender has a present BV of ​$6 comma 0006,000 and a present MV of ​$40004000. Data for the defender for the next three years are given below. Using a​ before-tax interest rate of 1515​% per​ year, make a comparison to determine whether it is economical to make the replacement now.

Answer 1

Answer:

During the first year, the marginal cost equals approximately the minimum EUAC cost. This is why the minimum cost of EUAC to maintain the defender throughout the year is $21,000. Since the minimum EUAC cost to maintain the defender the first year is less than the minimum EUAC cost to the challenger, the defender should not be substituted. This means, it is not economically feasible to make the replacement at this time.

Explanation:

According to the exercise, it is necessary to evaluate to know if it is economic to replace the defender by the challenger. For the calculation, the defender's information is: the defender's market value up to $3000. The expenses are $20000. The information regarding the challenger is: the installation cost $30000, the annual expenses $ 16000, the surrender value $ 2000, the economic life is 12 years, and the interest rate before taxes is 15%.

The minimum EUAC for the challenger is equal to:

$M_{EUAC} =installation-cost(A/P,i,n)+annual-expenses-salvage-value(A/F,i,n)\\M_{EUAC}=30000(A/P,15percent,12)+16000-2000(A/F,15percent,12)\\M_{EUAC}=(30000*0.1845)+16000-(2000*0.0345)=21466$

The minimal cost is equal to:

$M_{cost} =loss-in-marker-value-during-first-year+expenses-during-first-year\\M_{cost}=1000+20000=21000$