A company that makes micro motion compact Coriolis meters purchased a new packaging system for $600,000. The estimated salvage value was $28,000 after 10 years. Currently the expected re­maining life is 7 years with an AOC of $27,000 per year and an estimated salvage value of $40,000. The company is considering early re­placement of the system with one that costs $370,000, has a 12-year economic service life, a $22,000 salvage value, and an estimated AOC of $50,000 per year. The MARR for the corporation is 12% per year. (a) Determine the minimum trade-in value necessary now to make the replace­ment economically advantageous. (b) Write the spreadsheet functions necessary to determine RV using Goal Seek.

Question

What will be an ideal response?

Answer 1

(a) Relations to determine RV or minimum trade-in value

-RV(A/P,12%,7) – 27,000 + 40,000(A/F,12%,7) = -370,000(A/P,12%,12)
- 50,000 + 22,000(A/F,12%,12)

-RV(0.21912) – 27,000 + 40,000(0.09912) = -370,000(0.16144)
- 50,000 + 22,000(0.04144)

-RV(0.21912) = -108,821 + 23,035

RV = $391,502

(b) Spreadsheet functions:
AW for defender: = - PMT(12%,7,$B$1,40000) – 27000, if the RV value sought is in cell B1
AW for challenger: = - PMT(12%,12,-370000,22000) - 50000 displays $-108,821

Use Goal Seek to find RV = $391,501