Question

peryear interest, perform a replacement study or an for the two trade-in offers. 9.17 A piece of imaging equipment was purchased two usabl estim seco chase annu com annu pany years ago for $50,000 with an expected useful life of 5 years and a $5000 salvage value. Since its in- stallation performance was poor, it was upgraded for $20,000 one year ago. Increased demand now requires another upgrade for an addition so that it can be used for 3 more years. Its new an- nual operating cost will be $27,000 with a $12,000 9.21 A bi salvage after the 3 years. Alternatively, it can be replaced with new equipment costing $65,000, op- erating costs of $14,000 per year and an expected salvage of $23,000 after 3 years. If replaced now, the existing equipment will be sold for $7000. De- termine whether the company should keep or re- place the defender at a MARR of 10% per year. Tluu nlant manager asked you to do a cost analysis S22,(XX) tryin exist chas curr for a adeq coul

Answer 1

Expenditure incurred on imagining equipment previously are sunk and not relevant for decision making of replacing existing equipment with new equipment.

To determine whether existing equipment should be replaced or not, we will find differential cash flows of existing and new machine. If Net Present value of Differential cash flows is positive then replacing existing equipment is beneficial.

Please refer following spreadsheet for calculation.

F8 Cash Flow Existing New Differential cash flow PVF(10%) Present Value (PV) 36,000.00 11,818.18 10,743.80 18,031.56 4,593.54 3 Year 40 $(22,000.00)| $ (58,000.00)$ (36,000.00) 13,000.00 0.909091 $ 13,000.00 0.826446 $ 24,000.00 0.751315 $ 1$(27,000.00) $ (14,000.00) 2$(27,000.00$ (14,000.00) 7 3 $(15,000.00)$ 9,000.00$ Net Present Value of Differential Cash flows 10

Formula reference-

F8 Cash Flow Year Existin New Differential cash flow PVF( 10% Present Value 22000 27000 27000 =-27000+ 12000 -65000+7000 14000 14000 14000+23000 C4-B4 -C5-B5 -C6-B6 -C7-B7 =1/1.1A4 =1/1.1A5 =D4E4 =D5E5 =D6E6 ปุ่ 1.1AT Net Present Value of Differential Cash flows -SUM(F4:F7) 10

Net Present value of differential cash flows is $ 4,593.54, Thus, it is recommended to replace existing equipment.