JMJ Inc. bought a manufacturing line 5 years ago for $35M (million). At that time it was estimated to have a service life of 10 years and salvage value at the end of its service life of $10M. JMJ’s CFO recently proposed to replace the old line with a modern line expected to last 15 years and cost $95M. This line will provide $5M savings in annual O&M costs, increase revenues by $2M, and have a $15M salvage value. The seller of the new line is willing to accept the old line as a trade-in for its current fair market value, which is $12M. The CFO estimates that if the old line is kept for 5 more years, its salvage value will be $6M. If the MARR is 8% per year, should the company keep the old line or replace it with the new line?
JMJ Inc. bought a manufacturing line 5 years ago for $35M (million). At that time it was estimated to have a service life of 10 years and salvage value at the end of its service life of $10M. JMJ’s CFO recently proposed to replace the old line with a modern line expected to last 15 years and cost $95M. This line will provide $5M savings in annual O&M costs, increase revenues by $2M, and have a $15M salvage value. The seller of the new line is willing to accept the old line as a trade-in for its current fair market value, which is $12M. The CFO estimates that if the old line is kept for 5 more years, its salvage value will be $6M. If the MARR is 8% per year, should the company keep the old line or replace it with the new line?
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