A manufacturer has machine A that he had planned to retire i

A manufacturer has machine (A) that he had planned to retire in two years. His uniform yearly disbursements for this machine are $1,200. The present value of this machine installed is $2,000, while the net salvage value right now after moving out the old machine is $1,500. The salvage value in two years will be $700. A new machine (B) has just appeared on the market that runs faster and occupies less space. This machine costs $12,000 installed and the estimated uniform yearly disbursements for the new machine are $400. Its useful life is estimated at 10 years and the salvage value at $4,000. Tire minimum attractive return on the investment is 15%. Should the manufacturer buy the new machine or retain the old machine? The operating and maintenance cost per year for A is $2,000, that for B is $1,500.

Solution

13.10 We will solve this question by Annual worth method.

Annual worth of old car =Salvage value-repairs=1000-500 = $500

Annual worth of new car = -4000(A/P,6%,4)+1000(A/F,6%,4)-300 = -1154+229-300 = -1225

So should not buy new car