Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. Amachine working in that environment is deteriorating quickly and can be used for only one more year, atwhich time it will be scrapped with no salvage value. It was purchased 3 years ago for $88.000, and itsoperating cost for the next year is expected to be $56,000. A more corrosion-resistant challenger will cost$238,000 with an operating cost of $46,000 per year. It is expected to have a $50,000 salvage value afterits 10-year ESL. At an interest rate of 14% per year, what minimum replacement value would render thechallenger attractive?The minimum replacement value that would render the challenger attractive is $128498.7

Expected operating cost = $56,000Cost of a more corrosion-resistant challenger = $238,000Operating…

Answered: Because it fumes at room temperatures,…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A bhaliya
Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. A machine working in that environment is deteriorating quickly and can be used for only one more year, at which time it will be scrapped with no salvage value. It was purchased 3 years ago for $88,000, and its operating cost for the next year is expected to be $47,000. A more corrosion-resistant challenger will cost $236,000 with an operating cost of $48,000 per year. It is expected to have a $50,000 salvage value after its 10- year ESL. At an interest rate of 8% per year, what minimum replacement value would render the challenger attractive? The minimum replacement value that would render the challenger attractive is $ |
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May I ask for an explanation and solution to the question for a better understanding. Thank you!
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