An asset that was purchased 3 years ago for $100,000 is becoming obsolete faster than expected. The company thought the asset would last 5 years and that its book value would decrease by $20,000 each year and, therefore, be worthless at the end of year 5. In considering a more versatile, more reliable high-tech replacement, the company discovered that the presently owned asset has a market value of only $15,000. If the replacement is purchased immediately at a first cost of $75,000 and if it will have a lower annual worth, what is the amount of the sunk cost? Assume the company’s MARR is 15% per year.
An asset that was purchased 3 years ago for $100,000 is becoming obsolete faster than expected. The company thought the asset would last 5 years and that its book value would decrease by $20,000 each year and, therefore, be worthless at the end of year 5. In considering a more versatile, more reliable high-tech replacement, the company discovered that the presently owned asset has a market value of only $15,000. If the replacement is purchased immediately at a first cost of $75,000 and if it will have a lower annual worth, what is the amount of the sunk cost? Assume the company’s MARR is 15% per year.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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An asset that was purchased 3 years ago for $100,000 is becoming obsolete faster than expected. The company thought the asset would last 5 years and that its book value would decrease by $20,000 each year and, therefore, be worthless at the end of year 5. In considering a more versatile, more reliable high-tech replacement, the company discovered that the presently owned asset has a market value of only $15,000. If the replacement is purchased immediately at a first cost of $75,000 and if it will have a lower annual worth, what is the amount of the sunk cost? Assume the company’s MARR is 15% per year.
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