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 $29,000 for installation and will have an estimated economic life of 12 years and a $2,200 MV at that time. It is estimated that annual expenses will average $11,000 per year. The defender has a present BV of $5,000 and a present MV of $3500. Data for the defender for the next three years are given below. Using a before-tax interest rate of 15% 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 $2,500 $3,750 $18,000 2 2,000 2,500 25,000 1,500 1,250 32,000 3 Click the icon to view the interest and annuity table for discrete compounding when i = 15% per year. Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar.) Year EUAC 1 2 $ S1

Answer 1

For defender

EUAC for 1 yr = 3500 * (A/P, 15%,1) + 18000 - 2500 * (A/F, 15%,1)

= 3500 * 1.15 + 18000 - 2500

= 19525

EUAC for 2 yr = 3500 * (A/P, 15%,2) + 18000 - 2000 * (A/F, 15%,2)

= 3500 * 0.6151 + 18000 - 2000 * 0.4651

= 19222.65 ~ 19223

EUAC for 3 yr = 3500 * (A/P, 15%,3) + 18000 - 1500 * (A/F, 15%,3)

= 3500 * 0.4380 + 18000 - 1500 * 0.2880

= 19101

EUAC of Challenger = 29000 * (A/P, 15%,12) + 11000 - 2200 * (A/F, 15%,12)

= 29000 * 0.1845 + 11000 - 2200 * 0.0345

= 16274.60 ~ 16275

As the minimum EUAC of defender is more than challenger, it should be replaced right now