Question

As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $63,500. Its operating costs are $21,800 a year, but in five years the machine will require a $19,100 overhaul. Thereafter operating costs will be $30,900 until the machine is finally sold in year 10 for $6,350.

The older machine could be sold today for $25,900. If it is kept, it will need an immediate $24,500 overhaul. Thereafter operating costs will be $34,000 a year until the machine is finally sold in year 5 for $6,350.   

Both machines are fully depreciated for tax purposes. The company pays tax at 35%. Cash flows have been forecasted in real terms. The real cost of capital is 13%.

a. Calculate the equivalent annual costs for selling the new machine and for selling the old machine. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.)

	Equivalent Annual Cost
Sell new machine	$
Sell old machine	$

Answer 1

B C F G H I J K D E 23 4 5 6 9 10 63500 21800 21800 21800 21800 30900 30900 30900 30900 30900 21800 19100 -22225 41275 -7630 -7630 -7630 -7630 14170141701417014170 -14315 26585 -10815 20085 -10815 20085 -10815 20085 -10815 20085 -6350 -8592.5 15957.5 134979.13 24875.24 New Α 1 Year 2 Cost 3 Operating cost 4 Overhaul 5 Sold 6 Tax 7 Cash flow 8 9 PV 10 EAC 11 12 Year 13 Cost 14 Operating cost 15 Overhaul 16 Sold 17 Tax 18 Cash flow 19 20 PV 21 EAC 22 1 2 3 5 0 25900 34000 34000 34000 34000 34000 245001 -17640 32760 - 11900 22100 - 11900 22100 - 11900 22100 - 11900 22100 -6350 -9677.5 17972.5 108250.57 19949.45 Old

=B1+1 =D1+1 =E1+1 =F1+1 6141 =H11 -11+1 =J1+1 =K1+1 21800 21800 121800 121800 3090030900309003090030900 1 Ye: 0 2 CO 63500 3 Opl 4 Ow 5 Soll 6 Ta --SUMB2:35) 35% 7 Ca-SUMB2:B6) 21800 19100 -6350 |--SUMC2:05) 35% -SUM(C2:06) =-SUMD2:05) *35% -SUM(D2:06) --SUME2:ES) 35% -SUMIE2:E6) =-SUM(F2F5)*35% -SUM[F2-F6) = SUM(G2G5)*35% -SUM(G2:66) =-SUM H2H5)*35: -SUM12:15) *35 -SUM(H2-H6) -SUM(12:16) =-SUM(J2:15)*3596 =-SUM(K2:K5) 35% =-SUM L2:05)*35% -SUMU2:J6) -SUM(K2:K6) -SUM(L2:L6) | 9 PV -NPV(13%,C7:L7)+B7 10 EAC =PMT(13%.10.-B9) New 11 B12+1 =(12+1 =D12+1 =F12+1 =F12+1 34000 34000 34000 34000 34000 12 Ye: 0 13 Co: 25900 14 Opl 15 O 24500 16 Sol 17 Ta-SUMB13:316)*35% 18 Ca-SUMB13:817) 2-SUMC13.016)*35% -SUM/D13:015) *3522-SUME 13:E16) *35 |-SUM(C13:C17) -SUM(D13:D17) |-SUME13:E17) 1-6350 -SUM(F13:F16) "359-SUM(G13:16)*35% -SUM[F13:F17) -SUM(G13:17) 19 20 PV -NPV(13%,C18:G18) 818 21 EAL=PMT(13%.10.-820) Old