A company owns a milling machine that it is considering repl

A company owns a milling machine that it is considering replacing. Its current market value is $25,000, but it can be productively used for four more years at which time its market value will be zero. Operating and maintenance expenses are $50,000 per year. The company can purchase a new milling machine, with the same functionality as the current machine, for $90,000. In four years the market value of the new machine is estimated to be $45,000. Annual operating and maintenance costs will be $35,000 per year. Should the old milling machine be replaced using a before-tax MARR of 10% and a study period of four years? Attach File Browse My ComputerBrowse Content Collection

Solution

Annual cash saving in Operating expense 15000 (50000-35000) Annuity at 10% for 4 years 3.1699 Present valueof savings 47548.5 Present value of salvage 30735 (45000*0.683) Total present value of inflows 78283.5 Less: Investment (90000-25000) 65000 Net present value 13283.5 Hence the machine shall be replaced