Question

A tool and die company is considering the purchase of a drill press with fuzzy-logic software to improve accuracy and reduce tool wear. The company has the opportunity to buy a slightly used machine for $15,000 or new one for $21,000. Because the new machine is a more sophisticated model, its operating cost is expected to be $7000 per year, while the used machine is expected to require $8200 per year. Each machine is expected to have 25 years life with 5% salvage value. Tabulate the incremental cash flow

Answer 1

Salvage value, Used machine ($) = 15,000 x 5% = 750

Salvage value, New machine ($) = 21,000 x 5% = 1,050

For both machines, in year 25 (terminal year), Operating cost will be lower by the amount of its salvage value.

Incremental cash flow (New - Old) is as follows.

Year	First Cost: Old ($)	First Cost: New ($)	Incremental First Cost ($)	Operating Cost: Old ($)	Operating Cost: New ($)	Incremental Operating Cost ($)	Incremental Total Cost ($)
	(1)	(2)	(3)=(2)-(1)	(4)	(5)	(6)=(5)-(4)	=(3)+(6)
0	15,000	21,000	6,000			0	6,000
1				8,200	7,000	-1,200	-1,200
2				8,200	7,000	-1,200	-1,200
3				8,200	7,000	-1,200	-1,200
4				8,200	7,000	-1,200	-1,200
5				8,200	7,000	-1,200	-1,200
6				8,200	7,000	-1,200	-1,200
7				8,200	7,000	-1,200	-1,200
8				8,200	7,000	-1,200	-1,200
9				8,200	7,000	-1,200	-1,200
10				8,200	7,000	-1,200	-1,200
11				8,200	7,000	-1,200	-1,200
12				8,200	7,000	-1,200	-1,200
13				8,200	7,000	-1,200	-1,200
14				8,200	7,000	-1,200	-1,200
15				8,200	7,000	-1,200	-1,200
16				8,200	7,000	-1,200	-1,200
17				8,200	7,000	-1,200	-1,200
18				8,200	7,000	-1,200	-1,200
19				8,200	7,000	-1,200	-1,200
20				8,200	7,000	-1,200	-1,200
21				8,200	7,000	-1,200	-1,200
22				8,200	7,000	-1,200	-1,200
23				8,200	7,000	-1,200	-1,200
24				8,200	7,000	-1,200	-1,200
25				7,150	6,250	-900	-900