A presently owned machine has the projected mar­ket value and M&O costs shown below. An outside vendor of services has offered to provide the service of the existing machine at a fixed price per year. If the presently owned machine is replaced now, the cost of the fixed-price contract will be $33,000 per year. If the presently owned machine is replaced next year or any time after that, the contract price will be $35,000 per year. Determine if and when the defender should be replaced with the outside ven­dor using an interest rate of 10% per year. Assume used equipment similar to the defender will always be available, but that the current equipment will not be retained more than three additional years.

Question

Answer 1

Determine the ESL for the defender and compare to the AWC for the same number of years.



By hand:

AWD,1 = -32,000(A/P,10%,1) – 24,000 + 25,000(A/F,10%,1)

= -32,000(1.10) -24,000 + 25,000

= $-34,200

AWD,2 = -32,000(A/P,10%,2) - [24,000 + 1000(A/G,10%,2)] + 14,000(A/F,10%,2)

= -32,000(0.57619) – [24,000 + 1000(0.4762)] + 14,000(0.47619)

= $-36,247

AWD,3 = -32,000(A/P,10%,3) - [24,000 + 1000(A/G,10%,3)] + 10,000(A/F,10%,3)

= -32,000(0.40211) – [24,000 + 1000(0.9366)] + 10,000(0.30211)

= $-34,783



ESL for defender is n = 1 year with AWD = $-34,200



AWC = $-33,000 < AWD; replace the defender with the challenger now.



By spreadsheet: Defender ESL is n = 1; select challenger now