The replacement of a planning machine is being considered by the Reardom Furnitu

Question

The replacement of a planning machine is being considered by the Reardom Furniture Company. (There is an indefinite future need for this type of machine.) The bes challenger will cost $25,000 for installation and will have an estimated economic life of 11 years and a $2,500 MV at that time. It is estimated that annual expenses wi average $14,000 per year. The defender has a present BV of $5,000 and a present MV of $3500. Data for the defender for the next three years are given below. Using a before-tax interest rate of 18% per year, make a comparison o determine whether it is economical to make the replacement now Year MV at End of BV at End of Expenses during Year 1 $-1,50 22,250 -3,000 Year $3,750 2,500 1,250 the Year S22,000 27,000 32,000 Click the icon to view the interest and annuity table for discrete compounding when i= 18% per year. Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar.) EUAC $27630 sj274801 Year 3 $32345 Enter your answer in the edit fields and then click Check Answer. Clear All Final Check

Explanation / Answer

Item A has an investment cost of $25,000.00, a lifetime of 11 periods, with a maintenance cost per period of $14,000.00
Item B has an investment cost of $8,500.00, a lifetime of 3 periods, with a maintenance cost per period of $27,000.00. Assumed since nothing is mentioned in the question.

Calculate the Equivalent Annual Cost (EAC) for each Item using a cost of capital of 18% and determine a conclusion

Calculate v:

v = 0.8475

Calculate Discount Factor for Item 1:

a11|0.18 = 4.6555
In Microsoft Excel, this function can be written in a cell as =PV(0.18,11,-1)

Calculate Discounted Investment for Item 1:

Discounted Investment for Item 1 = $5,369.99

Calculate EAC for Item 1
EAC1 = Discounted Investment + Maintenance Cost
EAC1 = $5,369.99 + $14,000.00
EAC1 = $19,369.99

Calculate Discount Factor for Item 2:

a3|0.18 = 2.1738
In Microsoft Excel, this function can be written in a cell as =PV(0.18,3,-1)

Calculate Discounted Investment for Item 2:

Discounted Investment for Item 2 = $3,910.20

Calculate EAC for Item 2
EAC2 = Discounted Investment + Maintenance Cost
EAC2 = $3,910.20 + $27,000.00
EAC2 = $30,910.20

Determine Conclusion:
We invest in Machine 1 since it has the lower EAC

v  =   1    1 + Cost of Capital

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---