Air Links, a commuter airline company, isconsidering replacing one of its baggage-handlingmachines with a newer and more efficient one. Thecurrent book value of the old machine is $50,000, andit has a remaining useful life of five years. The salvage value expected from scrapping the old machineat the end of five years is zero, but the company cansell the machine now to another firm in the industryfor $10,000. The new baggage-handling machine hasa purchase price of $120,000 and an estimated usefullife of seven years. It has an estimated salvage valueof $30,000 and is expected to realize economic savings on electric power usage, labor, and repair costsand also to reduce the amount of damaged luggage.In total, an annual savings of $50,000 will be realizedif the new machine is installed. The firm uses a 15%MARR. Using the opportunity cost approach,(a) What is the initial cash outlay required for thenew machine?(b) What are the cash flows for the defender in yearszero through five?(c) Should the airline purchase the new machine?
Air Links, a commuter airline company, is
considering replacing one of its baggage-handling
machines with a newer and more efficient one. The
current book value of the old 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. The new baggage-handling machine has
a purchase price of $120,000 and an estimated useful
life of seven years. It has an estimated salvage value
of $30,000 and is expected to realize economic savings on electric power usage, labor, and repair costs
and also to reduce the amount of damaged luggage.
In total, an annual savings of $50,000 will be realized
if the new machine is installed. The firm uses a 15%
MARR. Using the
(a) What is the initial cash outlay required for the
new machine?
(b) What are the cash flows for the defender in years
zero through five?
(c) Should the airline purchase the new machine?
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