Question

show all steps for thump up

no excel

4. (20 points) A machine purchased 3 years ago for $140,000 is now too slow to satisfy demand. The machine can be upgraded now for $70,000 (and thus be able to satisfy demand) or be sold to a smaller company for $40,000. After upgrading, the existing machine will have an annual operating cost of $85,000 per year, and an estimated life of 3 years (after upgrading you will keep the machine for three years). There is no salvage value at the end of the three year period. Alternatively, a new machine could be purchased for $220,000. Its salvage value is estimated at $50,000 if sold in years 1 through 5, $20,000 if sold after 6 years and $10,000 if sold anytime thereafter. The machine is thought to have a useful life of 8 years. The annual operating cost of this new machine is $65,000 per year. Your boss asks that you perform an economic analysis using a 5 year study period, aid a MARR of 12%. What should the company do?

Answer 1

FIRST OPTION(Upgradatipn)

Annual operating cost - $85000 per year

PVIFA for 3 years @ the rate 12% = 2.402

Upgradation cost          = $70000

Add : Present value of annual repairs per annum for 3 years total cost = 85000* 2.402 =204170

Total cost    = 274170

Equivalent annual cost (EAC) ( $ 204170/2.402) = 274170/2.402 = 114142.381

SECOND OPTION (SALE)

First of all we shall calculate cash flows for each replacement cycle as follows

Purchase cost = $ 220000

Less: Sale price of old machine = $ 40000

Initial cash flow =$180000

	One Year Replacement Cycle
Year	Purchase Cost (-) Sale value of old machine	Annual operating cost	Salvage value	Net cash flow	PVF @ 12%	Present value
0	-180000			-180000	1	-180000
1		-65000	50000	-15000	0.893	-13395.000
					Total	-193395
	Two Years Replacement Cycle
Year	Purchase Cost (-) Sale value of old machine	Annual operating cost	Salvage value	Net cash flow	PVF @ 12%	Present value
0	-180000			-180000	1	-180000
1		-65000		-65000	0.893	-58045.000
2		-65000	50000	-15000	0.797	-11955.000
					Total	-250000
	Three Years Replacement Cycle
Year	Purchase Cost (-) Sale value of old machine	Annual operating cost	Salvage value	Net cash flow	PVF @ 12%	Present value
0	-180000			-180000	1	-180000.0
1		-65000		-65000	0.893	-58045.0
2		-65000		-65000	0.797	-51805.0
3		-65000	50000	-15000	0.712	-10680.0
					Total	-300530.0
	Four Years Replacement Cycle
Year	Purchase Cost (-) Sale value of old machine	Annual operating cost	Salvage value	Net cash flow	PVF @ 12%	Present value
0	-180000			-180000	1	-180000.0
1		-65000		-65000	0.893	-58045.0
2		-65000		-65000	0.797	-51805.0
3		-65000		-65000	0.712	-46280.0
4		-65000	50000	-15000	0.636	-9540.0
					Total	-345670.0
	Five Years Replacement Cycle
Year	Purchase Cost (-) Sale value of old machine	Annual operating cost	Salvage value	Net cash flow	PVF @ 12%	Present value
0	-180000			-180000	1	-180000.0
1		-65000		-65000	0.893	-58045.0
2		-65000		-65000	0.797	-51805.0
3		-65000		-65000	0.712	-46280.0
4		-65000		-65000	0.636	-41340.0
		-65000	50000	-15000	0.567	-8505.0
					Total	-385975.0

Replacement Cycles	EAC ($)
1 Year	193395 .893	-216567.75
2 Year	250000 1.690	-147928.99
3 Year	300530 2.402	-125116.57
4 Year	345670 3.038	-113782.09
5 Year	385975 3.605	-107066.57

Since Eac is lLEAST IN THE CASE OF REPLACEMENT CYCLE OF 5 YEAR,THAT IS 107066.57

If we compared between First option & Second option least cost involved in second option .So the second option is preferrable.

(The question asking to analyse using 5 year period , so didn't considered 6 to 8 year of second option)