A 4 yearold die casting machine of market value 3500 is 50

A 4 year-old die - casting machine, of market value $3500, is 50% too small for future production needs. A new machine with identical production capacity costs $5000 installed. Both machines are expected to have economic lives of 6 years from this date. Salvage values at that date will be $1000 for the new, and $700 for the old, machine. Annual operating expenses for the new and old machines are expected to be $3500 and $4000, respectively. A double - capacity machine is also available; its installed cost is $12000, with a salvage value of $2000 at the end of its 6 - year economic life. Operating costs are expected to be $6000 per year. If the MARR is lo%, which machine should be purchased?

Solution

The decision of purchasing a particular machine can be made made by having a look at equivalent uniform annual cost ( EUAC) for both the machines. It represents the total cost of owninfg and operating it over its entire lifespan. It is often used firms in order to make budgeting decisions. Machine with larger value represents more cost and should be dropped.

EUAC can be calulated using following formula:

EUAC = PW(A/P,10%,6)

where PW is net present worth

for small machine , EUAC = $9231

for large machine, EUAC = $8496

Hence , larger machine should be purchased as it has lower value of EUAC.