The replacement of a planning machine is being considered by the Reardorn Furnit

Question

The replacement of a planning machine is being considered by the Reardorn Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $25,000 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 $5,500 and a present MV of $4000. 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 S 1,000 - 1,250 - 1,500 Year $4,125 2,750 1,375 the Year $22,000 29,000 36,000 Click the icon to view the interest and annuity table for discrete compounding when i-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

Explanation / Answer

The way to calculate the capital recovery amount is as follows:
For example take year 1
if the equipment is replaced then the value firm receives is $ 4,000 (market value at that time) and earns 15% interest rate.
The second component is the difference between the market values. if replaced now, the firm receives $4000 nad replaced after one year, the firm receives -$1000.
Thus the difference between the two is the second component of the capital recovery amount.

Year Capital recovery amount Expenses for the year Total EUAC (15%) 1 [ (4000 * 0.15) + {(4000- (-1000)}] = 5600   22,000 27,600 27,600 2 [(-1000 * 0.15) + {(-1000)- (-1250)}] = -2400 29,000 26,600 24214 3 [(-1250 * 0.15) + {(-1250)- (-1500)}] = 2937.50 36,000 33062.5 27535

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