Question 10.P.6: XYZ Company is considering replacing a machine. The new impr......
XYZ Company is considering replacing a machine. The new improved machine will cost $16000 installed; it will have an estimated service life of 8 years and $3000 salvage value. It is estimated that operating expenses will average $1000 a year. The present machine was purchased for $20 000 four years ago and is ,estimated to have 8 more years of service life, at the end of which its salvage value will be $2000. Operating costs are $1800 per year. If replaced now, it can presumably be sold for $5000. Using a MARR of 15%, determine whether to replace the existing machine.
Compare present-worth costs over the next 8 years.
PW_{\text{new}} = $16 000 + $1000(P/A, 15%, 8) – $3000(P/F, 15%, 8) = $19 507
PW_{\text{existing}} = $5000 + $1800(P/A, 15%, 8) – $2000(P/F, 15%, 8) = $12 423
Do not replace the machine.