State-of-the-art digital imaging equipment purchased 2 years ago for $50,000 had an expected useful life of 5 years and a $5000 salvage value. After its installation the performance was poor, and it was upgraded for $20,000 one year ago. Increased demand now requires another upgrade for an additional $22,000 so that it can be used for 3 more years. Its new annual operating cost will be $27,000 with a $12,000 salvage after the 3 years. Alternatively, it can be replaced with new equipment costing $65,000, an estimated AOC of $14,000, and an expected salvage of $23,000 after 3 years. If replaced now, the existing equipment can be traded for only $7000. Use a MARR of 10% per year. (a) Determine whether the company should retain or replace the defender now. (b) Based on the poor experience with the current equipment, assume the person doing this analysis decides the challenger may be kept for only 2 years, not 3, with the same AOC and salvage estimates for the 2 years. What is the decision?
State-of-the-art digital imaging equipment purchased
2 years ago for $50,000 had an expected
useful life of 5 years and a $5000 salvage value.
After its installation the performance was poor,
and it was upgraded for $20,000 one year ago.
Increased demand now requires another upgrade
for an additional $22,000 so that it can be used for 3 more years. Its new annual operating cost
will be $27,000 with a $12,000 salvage after the
3 years. Alternatively, it can be replaced with
new equipment costing $65,000, an estimated
AOC of $14,000, and an expected salvage of
$23,000 after 3 years. If replaced now, the existing
equipment can be traded for only $7000. Use
a MARR of 10% per year. (a) Determine whether
the company should retain or replace the defender
now. (b) Based on the poor experience
with the current equipment, assume the person
doing this analysis decides the challenger may be
kept for only 2 years, not 3, with the same AOC
and salvage estimates for the 2 years. What is the
decision?
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