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 $35,000 for installation and will have an estimated economic life of 14 years and a $2,000 MV at that time. It is estimated that annual expenses will average $17,000 per year. The defender has a present BV of $6,000 and a present MV of $4000. Data for the defender for the next three years are given below. Using a before-tax interest rate of 10% per year, make a comparison to determine whether it is economical to make the replacement now. Year MV at End of BV at End of Expenses during Year Year the Year 1 $-1,000 $4,500 $20,000 - 1,500 3,000 26,000 - 2,000 1,500 32,000 Click the icon to view the interest and annuity table for discrete compounding when i = 10% per year. Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar.) EUAC $ 25,400 $ 25,876 $ 27,832 The EUAC for the challenger over its useful life is $ (Round to the nearest dollar.)

Answer 1

As all other values are already calculated, I am just calculating EUAC of challenger

I = 10%

EUAC of the challenger = 35000 * (A/P, 10%,14) + 17000 - 2000 * (A/F, 10%,14)

= 35000 * 0.1357 + 17000 - 2000 * 0.0357

= 21678.10 ~ 21678

As EUAC of challenger over its economic life is less the minimum EUAC of defender, Defender should be replaced right away