A presently owned machine can last 3 more years, if properly maintained at a cost of $15,000 per year. Its AOC is $31,000 per year. After 3 years, it can be sold for an estimated $9000. A replacement costs $80,000 with a $10,000 salvage value after 3 years and an operating cost of $19,000 per year. Different vendors have offered $10,000 and $20,000, respectively, for the current system as trade-in for the replacement machine. At i = 12% per year, perform a replacement study and determine whether the defender should be retained or replaced.
What will be an ideal response?
AWC = -80,000(A/P,12%,3) - 19,000 + 10,000(A/F,12%,3)
= -80,000(0.41635) - 19,000 + 10,000(0.29635)
= $-49,345
For the defender, the higher trade-in value applies, because that represents the best market
value estimate
AWD = -20,000(A/P,12%,3) -15,000 – 31,000 + 9000(A/F,12%,3)
= -20,000(0.41635) -15,000 – 31,000 + 9000(0.29635)
= $-51,660
AWC < AWD; select the challenger
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