The repla ment of a planning machine is being considered by

The repla ment of a planning machine is being considered by the Reardorn Furniture Company. (There is an ndefinite future need for this type of machine.) The best challenger will cost $35,000 for installation and will have an estimated economic life of 12 years and a $2,000 MV at that time. It is estimated that annual expenses will average $11,000 per year. The defender has a present BV of $5,000 and a present MV of $2500. 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 Year MV at End of BV at End of Expenses during Year $1,500 1,250 1,000 Year $3,750 2,500 1,250 the Year $20,000 25,000 30,000 3 Click the icon to view the interest and annuity table for discrete compounding when 1-15% per year Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar.) Year EUAC 2

Solution

Calculation Equalent Annual cost for the Challenger

Present value of replacing the challenger with defender in each year

Based on the above calculatios the Challenger should be replaced with the defender immediatly

EAUC Values for year 1-3

Initial Outlay		35000
Less: Present value of salvage value	2000x.187	374
(A)		34626
Annuity factor (B)	5.421
(A) / (B) = C		6387.382
Annual expenses (D)		11000
Equalent annual cost (C) + (D)		17387.38