Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. A machine, working in that environment, is deteriorating fast and can be used for only 1 more year, at which time it will be scrapped with no salvage value. It was purchased 3 years ago for $88,000; its operating cost for the next year is expected to be $53,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum replacement value would render the challenger attractive?
What will be an ideal response?
-RV(A/P,15%,1) – 53,000 = -226,000(A/P,15%,10) – 48,000 + 60,000(A/F,15%,10)
-RV(1.15) – 53,000 = -226,000(0.19925) – 48,000 + 60,000(0.04925)
-1.15RV = -90,076 + 53,000
Minimum RV = $32,240
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