A present asset (defender) has a current market value of $85,000 (year 0 dollars). Estimated market values at the end of the next three years, expressed in year 0 dollars, are MV1 = $73,000, MV2 = $60,000, MV3 = $40,000. The annual expenses (expressed in year 0 dollars) are $15,000 and are expected to increase at 4.5% per year. The before-tax nominal MARR is 15% per year. The best challenger has an economic life of five years and its associated EUAC is $39,100. Market values are expected to increase at the rate of inflation which is 3% per year. Based on this information and a before-tax analysis, what are the marginal costs of the defender each year and when should you plan to renlace the defender with the challenger?

A present asset (defender) has a current market value of $85,000 (year 0 dollars). Estimated market values at the end of the next three years, expressed in year 0 dollars, are MV1 = $73,000, MV2 = $60,000, MV3 = $40,000. The annual expenses (expressed in year 0 dollars) are $15,000 and are expected to increase at 4.5% per year. The before-tax nominal MARR is 15% per year. The best challenger has an economic life of five years and its associated EUAC is $39,100. Market values are expected to increase at the rate of inflation which is 3% per year. Based on this information and a before-tax analysis, what are the marginal costs of the defender each year and when should you plan to renlace the defender with the challenger?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A present asset (defender) has a current market value of $85,000 (year 0 dollars).
Estimated market values at the end of the next three years, expressed in year 0 dollars,
are MV1 = $73,000, MV2 = $60,000, MV3 = $40,000. The annual expenses (expressed in
year 0 dollars) are $15,000 and are expected to increase at 4.5% per year. The before-tax
nominal MARR is 15% per year. The best challenger has an economic life of five years
and its associated EUAC is $39,100. Market values are expected to increase at the rate of
inflation which is 3% per year. Based on this information and a before-tax analysis,
what are the marginal costs of the defender each year and when should you plan to
replace the defender with the challenger?

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