A specialized machine essential for a company's operations costs $5,000 and has operating costs of $2,000 the first year. The operating costs increase by $1,000 each year thereafter. We assume that the operating costs occur at the end of each year. The interest rate is 20% and the company plans to stay in operation forever. You have an option to replace the machine periodically after a period of n years, where n must be an integer. The replacement cost is $5,000. Your objective is to select the replacement period n such that the present value of the total cost is minímized. Assume that due to its specialized nature, the machine has no salvage value. What is the optimal replacement period, n? Note n must be an integer.

A specialized machine essential for a company's operations costs $5,000 and has operating costs of $2,000 the first year. The operating costs increase by $1,000 each year thereafter. We assume that the operating costs occur at the end of each year. The interest rate is 20% and the company plans to stay in operation forever. You have an option to replace the machine periodically after a period of n years, where n must be an integer. The replacement cost is $5,000. Your objective is to select the replacement period n such that the present value of the total cost is minímized. Assume that due to its specialized nature, the machine has no salvage value. What is the optimal replacement period, n? Note n must be an integer.

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 specialized machine essential for a company's operations costs $5,000 and has operating costs of
$2,000 the first year. The operating costs increase by $1,000 each year thereafter. We assume that
the operating costs occur at the end of each year. The interest rate is 20% and the company plans to
stay in operation forever.
You have an option to replace the machine periodically after a period of n years, where n must be an
integer. The replacement cost is $5,000. Your objective is to select the replacement period n such
that the present value of the total cost is minímized. Assume that due to its specialized nature, the
machine has no salvage value.
What is the optimal replacement period, n?
Note n must be an integer.

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