The equivalent annual worth of an existing ma­chine at American Semiconductor is estimated to be $ ?70,000 per year over its remaining useful life of 3 years. It can be replaced now or later with a machine that will have an AW of $ ?90,000 per year if it is kept for 2 years or less, $75,000 if it is kept between 3 and 5 years, and $ ?65,000 if it is kept for 6 to 8 years. The company wants an analy­sis of what it should do for a 3-year study period at an interest rate of 15% per year. You should rec­ommend that the existing machine be replaced: (choose one)

Question

(a) Now
(b) One year from now
(c) Two years from now
(d ) Do not replace it

Answer 1

For a 3-year study period, there is no combination of defender and challenger machines that will be as low as $-70,000 by keeping the defender.

Answer is (d) Do not replace it.