Question

When evaluating whether a currently used machine should be replaced and when the initial cost of acquiring the existing machine (the defender) Select one a. needs to be included with a negative sign, without any discounting, in calculating the present worth of the decision to replace. b. should be forwarded to the future worth as of the current year and included in the project's cash flows. should not be included among the cash flows relevant for making the decision whether and when to replace. d. should be compared directly against the initial cost of the challenger. There is a project currently under way in your company. Assume it has been decided that the currently used machine will not be replaced with a new one, and instead the project will be abandoned. The currently used machine can last for up to 3 more years of service. How should it be decided when to abandon the project? Select one a. Using the project's projected revenues and costs, calculate the present worth separately for each alternative (abandoning now, abandoning in 1 year, abandoning in 2 years, abandoning in 3 years) and select the one with the highest present worth b. Abandon the project if the machine's after-tax salvage value is greater than the cost of operating the machine for another year. If kept repeat again next year, and so on afterwards. cCompare the marginal revenue and marginal cost of keeping the machine for one more year and keep the machine for another year if the marginal revenue is greater than the marginal cost. Repeat again for the second, and then third year, and abandon before

Answer 1

When an old machine is replaced with a new one, it is replaced for the purpose of reducing operating costs or productions costs or for the purpose of improving efficiency or for increasing output.

Here in such a case, while calculating the net cash outflow or annual cash flows or Net Present Value the initial cost of acquiring is not included in anywhere else. Only sale value of the existing machine is required to deduce from the cost of the new machine to get to net cash outflow.

Existing machine's initial cost of acquiring becomes irrelevant in calculations to decide whether to replace or not.

Below mentioned are the three proforma needed in calculating the NPV value to decide on whether to replace the old machine or continue with the old machine. In any of these proforma there is no indication of the initial cost of old machine acquisition.

Please check the below images.

So, the answer to the above question would be

(c) Should not be included among the cash flows relevant for making the decision whether and when to replace.

Hope the solution is understandable. In case not, please comment i will be glad to answer.

All the Best. Thank you,

Cof ICTE 21XXL Particulars 12 Cost of new machine less: sale value of old machine Cor 27/ All: Increase in tax due to capital gain (sak Nalue - Book value) xtant U XXX less: Decrease in tax due to Capital loss (Book walue - sale value) starlo COF X X X | Add: Increase in Net working Capital (NHC) 103 less: Decrease in Net working Capital (NKI) ... Net Cash out flow (Co) * Coated I prátit Taxt XXX II. Calculation of annual Cash flows Affer Tax CCFAT) (ti- tn) : - Particulars R. Decrease in operating cost less, Increase in taxes due to decrease xx en Coslo XXX Add: Tax Savings due to additional depreciation. I ( New depreciation - old depreciation) | Tax rate ni Annual CFATEH -tn)

X T Calculation of Net present Value (npv) :- Rs. x x x FAT Particulan Annual CFAT xp of annuity of Rs. 1 at kolono for N years EPUCRAT pv of increase an Nucc. (Increase in Nakx pv factor decrease at klo fornth year) 9. e. Add: Increar in Nuca pv factor an at ko for nth year. (decrease - & xx 100 less: Decrease in wine & pufactor at ko% for with year. less: Net Cash out flow (co) xxx NP v