A machine purchased 3 years ago for $140,000 is now too slow to satisfy the demand of the customers. It can be upgraded now for$86,000 or sold to a smaller company internationally for $47,000. The upgraded machine will have an annual operating cost of$92,000 per year and a $37,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 moreyears, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which willserve the company now and for a maximum of 8 years, costs $222,000. Its salvage value will be $57,000 for years 1 through 5;$20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $45,000 per year. Perform an economicanalysis at 9% per year using a specified 3-year planning horizon.a) Determine if the current machine should be replaced now or 3 years from now.b) Once decided, determine the equivalent AW for the next three years.a) The current machine should be replaced nowb) The equivalent AW for the next three years is $

Answered: A machine purchased 3 years ago for…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A machine purchased 3 years ago for $140,000 is now too slow to satisfy the demand of the customers. It can be upgraded now for
$86,000 or sold to a smaller company internationally for $47,000. The upgraded machine will have an annual operating cost of
$92,000 per year and a $37,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 more
years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which will
serve the company now and for a maximum of 8 years, costs $222,000. Its salvage value will be $57,000 for years 1 through 5;
$20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $45,000 per year. Perform an economic
analysis at 9% per year using a specified 3-year planning horizon.
a) Determine if the current machine should be replaced now or 3 years from now.
b) Once decided, determine the equivalent AW for the next three years.
a) The current machine should be replaced now
b) The equivalent AW for the next three years is $

Expert Solution

Step 1

To decide whether the presently owned machine should be replaced now or after 3 years from now, find the total annual worth of the presently owned machine and challenger machine for 3 year period and compare them.

Total annual worth is calculated using the below relation :

Total AW = - Capital Recovery - AW of annual maintenance and operating cost

For the presently owned machine and new machine, the total annual worth is (annual maintenance and operating costs are constant over 3 year period)

Total AW = [- P(A/P,i,n) + S (A/F, i,n)] - [AOC]

Where P is present market value, n is the number of years retained, S is salvage value at n, AOC is the annual operating cost per year and i is the interest rate.

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