Question

The replacement of a planning machine is being considered by the Reardom furniture company. the best challenger will cost 32,000 for installation and will have an estimated economic life of 11 years and a 1,500 MV at that time. it is estimated that annual expenses will average 12,000 per year. the defender has a present bv of 5,500 and a present mv of 4000. 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.

5 of 7 (3 complete) Year MV at End of BV at End of Expenses during Year Year the Year $3,000 $4,125 $22.000 2.750 2.750 26.000 2.500 1.375 30.000 for years 1-3. (Round to the nearest dollar.) Year EUAC 3 Check Answer

Answer 1

EUAC of Challenger = 32000 * (A/P, 15%,11) + 12000 - 1500 * (A/F, 15%,11)

= 32000 * 0.1911 + 12000 - 1500 * 0.0411

= 18053.55

For Defender

EUAC of yr 1 = 4000 * (A/P, 15%,1) + 22000 - 3000 * (A/F, 15%,1)

= 4000 * 1.15+22000-3000* 1

= 23600

EUAC for yr 2 = 4000 * (A/P, 15%,2) + 22000 + 4000 * (A/G, 15%,2) - 2750 * (A/F, 15%,2)

= 4000 * 0.6151 + 22000 + 4000 * 0.4651 - 2750 * 0.4651

= 25041.77 ~ 25042 (Nearest Dollar)

EUAC for yr 3 = 4000 * (A/P, 15%,3) + 22000 + 4000 * (A/G, 15%,3) - 2500 * (A/F, 15%,3)

= 4000 * 0.4380 + 22000 + 4000 * 0.9071 - 2500 * 0.2880

= 26660.40 ~ 26660 (Nearest Dollar)

As EUAC of Challenger is less than the EUAC for each year of defender, therefore defender should be replaced now