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.
What will be an ideal response?
(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
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