Question

The replacement of a planning machine is being considered by the Reardom Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $25,000 for installation and will have an estimated economic life of 13 years and a $1,800 MV at that time. It is estimated that annual expenses will average $15,500 per year. The defender has a present BV of $5,500 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 1 $2,500 $4,125 $18,000 2 2,000 2.750 23,000 3 1,500 1,375 28,000 Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar) Year EUAC 1 2 JO 3 Enter your answer in the edit fields and then click Check Answer.

Answer 1

Answer: EUAC of Defender is computed as under: For Year 1: → $3500 (AlP, 15),1) + $18000 + $ 2500 (ALF, 15),1) → $3500 ( 1.15) + $ 18000 + $ 2500 ( 1) $4025 + $18000 + $2500 $ 24525 Tos Year 2: > $3500 (Alp, 15%, 2) + $18000+ $5000 (A/G, 15%, 2) + $2000 (ALF, 15),2) = $3500 ( 0.61512) + $18000 + $5000 ( 0.465)+ $2000 (0.4651) $2152.92 + $18000 + $ 2325 + $930.2 $23408.12 For Year 3: $3500 ( Alp, 15), 3) + $18000 + $5000 (A)G, 157,3) + $ 1500 (A/F, 15%) $3500 (0.43798) + $18000 + $ 5000 (0-907) + $ 1500 (0.28798) $1532.93 + $18000 + $ 4535 + $43) 97 → > $ 244999 EUAC of Challenges: $25000 (AlP,15%, 13) + $15500 - $ 1800 (AlF, 15%, $25000 ( 0.1791) + $issoo $1800 (0.0290) $4477 .75 + $15soo $52.398 $19925.35 Thus, as the Eunc of Challenger is lower than the minimum EUAC of Defender, the Defender should be replaced immediately.