Problem 1340 You are considering the purchase of a new highe

Problem 13-40 You are considering the purchase of a new high-efficiency machine to replace older machines now. The new machine can replace four of the older machines, cach with current market value of S600. The new machine will cost $5000 and will save the equivalent of 10,000 kWh of electricity per year. After a period of 10 years, neither option will have any market value. If you use a before-tax MARR of 25% and pay $0.075/kWh, would you replace the old machines today with the new one?

Solution

Annual electricity saving = 10,000 x $0.075 = $750

Total market value of old machines in year 0 = $600 x 4 = $2,400

Net first cost of new machine, year 0 = $5,000 - $2,400 = $2,600

Present worth of new machine ($) = - 2,600 + 750 x P/A(25%, 10) = - 2,600 + 750 x 3.5705** = - 2,600 + 2,677.88

= 77.88

Since Present worth of new machine is positive, the old machines should be replaced.

**From P/A Factor table