Acme-Denver Corporation is considering the replacement of an old, relatively inefficient surface-grinder machine that was purchased seven years ago at a cost of $12,000. The machine had an original expected life of 10 years and a zero estimated salvage value at the end of that period. The current market value of the machine is $2,000. The divisional manager reports that a new machine can be bought and installed for $14,000. Over its five-year life, this machine will expand sales from $10,000 to $12,500 a year and, furthermore, will reduce labor and raw materials usage sufficiently to cut annual operating costs from $7,000 to $5,000. The new machine has an estimated salvage value of $4,000 at the end of its five-year life. The firm's MARR is 12%.(a) Should the new machine be purchased now?(b) What current market value of the new machine would make the two options equal?
Acme-Denver Corporation is considering the replacement of an old, relatively inefficient surface-grinder machine that was purchased seven years ago at a cost of $12,000. The machine had an original expected life of 10 years and a zero estimated salvage value at the end of that period. The current market value of the machine is $2,000. The divisional manager reports that a new machine can be bought and installed for $14,000. Over its five-year life, this machine will expand sales from $10,000 to $12,500 a year and, furthermore, will reduce labor and raw materials usage sufficiently to cut annual operating costs from $7,000 to $5,000. The new machine has an estimated salvage value of $4,000 at the end of its five-year life. The firm's MARR is 12%.
(a) Should the new machine be purchased now?
(b) What current market value of the new machine would make the two options equal?
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