Question 9.8: When to Retire an Asset (No Replacement) An $80,000 baling m...
When to Retire an Asset (No Replacement)
An $80,000 baling machine for recycled paper was purchased by the XYZ company two years ago. The current MV of the machine is $50,000, and it can be kept in service for seven more years. MARR is 12% per year and the projected net annual receipts (revenues less expenses) and end-of-year market values for the machine are shown below. When is the best time for the company to abandon this project?
| End of Year | |||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Net annual receipts | $20,000 | $20,000 | $18,000 | $15,000 | $12,000 | $6,000 | $3,000 |
| Market value | 40,000 | 32,000 | 25,000 | 20,000 | 15,000 | 10,000 | 5,000 |
The PWs that result from deciding now to keep the machine exactly one, two, three, four, five, six, and seven years are as follows:
Keep for one year:
PW(12%) = −$50,000 + ($20,000 + $40,000)(P/F, 12%, 1) = $3,571.
Keep for two years:
PW(12%) = −$50,000 + $20,000(P/F, 12%, 1) + ($20,000 + $32,000)× (P/F, 12%, 2) = $9,311.
In the same manner, the PW for years three through seven can be computed. The results are as follows.
Keep for three years: PW(12%) = $14,408
Keep for four years: PW(12%) = $18,856
Keep for five years: PW(12%) = $21,466 ← Best abandonment time
Keep for six years: PW(12%) = $21,061
Keep for seven years: PW(12%) = $19,614
As you can see, PW is maximized ($21,466) by retaining the machine for five years. Thus, the best abandonment time for this project would be in five years .