A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient one. The relevant details for both defender and challenger are as follows:Defender: The current book value of the old boring machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000.Challenger: The new boring machine can be purchased at a price of $150,000 and has an estimated useful life of seven years. It has an estimated salvage value of $50,000 and is expected to realize economic savings on electric power usage, labor, and repair costs and to reduce the number of reworks. In total, annual savings of $80,000 will be realized if the new machine is installed.The firm uses an MARR of 12%. Using the opportunity-cost approach, address the following questions:(a) What is the initial cash outlay required for the new machine?(b) What are the cash flows for the defender in years zero to five?(c) Should the firm purchase the new machine?
A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient one. The relevant details for both defender and challenger are as follows:
Defender: The current book value of the old boring machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000.
Challenger: The new boring machine can be purchased at a price of $150,000 and has an estimated useful life of seven years. It has an estimated salvage value of $50,000 and is expected to realize economic savings on electric power usage, labor, and repair costs and to reduce the number of reworks. In total, annual savings of $80,000 will be realized if the new machine is installed.
The firm uses an MARR of 12%. Using the opportunity-cost approach, address the following questions:
(a) What is the initial cash outlay required for the new machine?
(b) What are the cash flows for the defender in years zero to five?
(c) Should the firm purchase the new machine?
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