A 2-year-old injection molding machine was expected to be kept in service for its projected life of 5 years, but a new challenger promises to be more efficient and have lower operating costs. You have been asked to determine if it would be economically attractive to replace the defender now or keep it for 3 more years as originally planned. The defender had a first cost of $300,000, but its market value now is only $100,000. It has chargeable expenses of $120,000 per year and no expected salvage value. To simplify calculations for this problem only, assume that SL depreciation was charged at $60,000 per year, and that it will continue at that rate for the next 3 years. The challenger will cost $420,000, have a 3-year life, and no salvage value. It will have chargeable expenses of $30,000 per year, and it will be depreciated at $140,000 per year (again, using SL depreciation for simplicity for this problem only). Assume a Te of 35%, and an aftertax MARR of 15% per year. Determine (a) through (c) by hand. (a) Determine the CFAT in year 0 for the challenger and defender. (Hint: There may be a DR, CG, or CL to consider.) (b) Determine the CFAT in years 1 through 3 for the challenger and defender. (c) Conduct an AW-based evaluation to determine if the defender should be kept for 3 more years or replaced now. (d) Use a spreadsheet to perform the AW-based evaluation.
A 2-year-old injection molding machine was
expected to be kept in service for its projected life
of 5 years, but a new challenger promises to be
more efficient and have lower operating costs. You
have been asked to determine if it would be
economically attractive to replace the defender
now or keep it for 3 more years as originally
planned. The defender had a first cost of $300,000,
but its market value now is only $100,000. It has
chargeable expenses of $120,000 per year and no
expected salvage value. To simplify calculations for this problem only, assume that SL
was charged at $60,000 per year, and that it will
continue at that rate for the next 3 years.
The challenger will cost $420,000, have a
3-year life, and no salvage value. It will have
chargeable expenses of $30,000 per year, and it
will be depreciated at $140,000 per year (again,
using SL depreciation for simplicity for this
problem only). Assume a Te of 35%, and an aftertax
MARR of 15% per year. Determine (a)
through (c) by hand.
(a) Determine the CFAT in year 0 for the challenger
and defender. (Hint: There may be a
DR, CG, or CL to consider.)
(b) Determine the CFAT in years 1 through 3 for
the challenger and defender.
(c) Conduct an AW-based evaluation to
determine if the defender should be kept for
3 more years or replaced now.
(d) Use a spreadsheet to perform the AW-based
evaluation.
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