ment Replacement Decision) Objective: The proposed manufacturing plant has a food packaging equipment. The analysis would provide Jacob with decision support as to use that equipment or procure a new one. Scenario: The current equipment was purchased eight years ago for $ 750,000 and has eight useful years remaining. The new machine will cost $ 380,000 and will have the same useful life remaining as the old machine and will have zero disposal value. Currently the annual operating cost is $ 110,000 and will reduce by 50% if the new equipment is purchased. If the new equipment is procured, it will need to be shut down once a year for maintenance purposes. Opportunity cost of the shut down period is as follows: • $ 6,000 in each of the years 1-3 • $ 8,000 in each of the years 4 and 5 • $ 10,000 in each of the years 6 and 7
Appendix Four (Equipment Replacement Decision)
Objective: The proposed manufacturing plant has a food packaging equipment. The analysis would
provide Jacob with decision support as to use that equipment or procure a new one.
Scenario:
The current equipment was purchased eight years ago for $ 750,000 and has eight useful years
remaining. The new machine will cost $ 380,000 and will have the same useful life remaining as the old
machine and will have zero disposal value. Currently the annual operating cost is $ 110,000 and will
reduce by 50% if the new equipment is purchased.
If the new equipment is procured, it will need to be shut down once a year for maintenance purposes.
Opportunity cost of the shut down period is as follows:
• $ 6,000 in each of the years 1-3
• $ 8,000 in each of the years 4 and 5
• $ 10,000 in each of the years 6 and 7
The old equipment will have limited use and can only fetch $ 120,000 when disposed off at this time.
Methodology:
The group would calculate the net advantage/ disadvantage of buying the new equipment by applying a
discount rate of 10% wherever applicable
Step by step
Solved in 2 steps
Did not apply any discount rate of 10%.
How are we calculating this income from annual operating cost? what's the logic
Income from annual operating cost= (Annual cost * % of reduction * no of the year)
=$110,000* 50% *7
=$385,00
by Bartleby Expert
