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A company is considering replacing an existing machine (defender) with newer machine (challenger). If repaired, the defender can be used for another 5 years. After that, it cannot be used and must be replaced regardless of economic value. The current market value of the defender is $7,500 (i.e., it can be sold now for $7,500). The defender will have a salvage value after 5 years of $500. If kept, the defender will require an immediate $1,500 overhaul. The characteristics of the Defender are presented in the following table:

year Operating Cost Maintenance Cost Market Value
0 - 1500 7500
1 2000 200 4800
2 2700 300 3200
3 3800 500 2000
4 5000 1000 1200
5 6500 2000 500

The new machine (Challenger) has a service life of 7 years. It will cost $16,000 to purchase now. Its annual operation and maintenance cost combined is $1,600 per year in the first year. This annual operation and maintenance cost will increase by 42% per year for subsequent years. The market value of the challenger will decline by 22% every year over its service life. Use MARR equals 12%. a] Find the economic lives of: [i] the defender and [ii] the challenger. b] Determine when the defender should be replaced. Clearly show your calculations steps.

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Jean Keeling
Jean KeelingLv2
28 Sep 2019

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