Problem 6 A five-year-old defender purchased at $8000 has a current market value
ID: 2799960 • Letter: P
Question
Problem 6 A five-year-old defender purchased at $8000 has a current market value of $5000 and expected O&M; costs of $3000 this year, increasing by $1500 per year. Future market values are expected to decline by $1000 per year. The machine can be used for another three years. The challenger costs $8000 and has O&M; costs of $2000 per year, increasing by $1000 per year. The machine will be needed for only three years, and the salvage value at the end of that time is expected to be $2000. The MARR is 12%. (a) Determine the annual cash flows for retaining the old machine for three years. (b) Determine whether now is the time to replace the old machine. First show the annual cash flows for the challenger Assume that the given lives are the corresponding economic livesExplanation / Answer
A) Annual cash flows for retaining the challenger:
Year 0: 0
Year 1: -3000
Year 2: -(3000+1500) = -4500
Year 3: -(3000+1500+1500) + (5000-3000) = -4000
B) Annual cash flows for challenger:
Year 0: 5000-8000 = -3000
Year 1: -2000
Year 2: -(2000+1000) = -3000
Year 3: -(2000+1000+1000)+2000 = -2000
NPV of defender = -3000/1.12 -4500/1.12^2 - 4000/1.12^3
= -9113.05
NPV of challenger:
= -3000 - 2000/1.12 - 3000/1.12^2 - 2000/1.12^3
= -8600.86
Yes, since the NPV of cash flows from the challenger is higher.