Question 10.P.2: A machine can be sold now for $15 000; if kept for another y......
A machine can be sold now for $15 000; if kept for another year, its salvage value will decline to $13 000. The operating expenses for this year are expected to be $30 000. A new machine is available for $50 000, with expected operating expenses of $18 000 for the first year, increasing by $1000 a year because of deterioration. It is believed that after 5 years new technology would make replacement necessary; the new machine’s salvage value at that time is estimated to be $20 000. The MARR is 20%. Should the new machine be acquired?
By (10.1),
(CUV – SV_1) (AIP, i%, n_1) + i SV_1 + A_1(n_1)
= (P_2 – SV_2) (AIP, i%, n_2) + i SV_2 + A_2(n_2) (10.1)
(CUV – $13 000) (A/p, 20%, 1) + (0.20) ($13 000) + $30 000
= ($50 000 – $20 000) (A/p, 20%, 5) + (0.20) ($20 000) + $18 000 + $1000(A/G, 20%, 5)
whence CUV = $13 893.25. Since the comparative use value of the old machine is smaller than its net market value ($15 000), the machine should be replaced.