# A firm is considering replacing a machine that has been used to make a certain kind of

## Question:

A firm is considering replacing a machine that has been used to make a certain kind of packaging material. The new, improved machine will cost $31,000 installed and will have an estimated economic life of 10 years with a salvage value of$2,500. Operating costs are expected to be $1,000 per year throughout the service life of the machine. The old machine (still in use) had an original cost of$25,000 four years ago, and at the time it was purchased, its service life (physical life) was estimated to be seven years with a salvage value of $5,000. The old machine has a current market value of$7,700. If the firm retains the old machine, its updated market values and operating costs for the next four years will be as given in Table P14.8.
The firm's MARR is 12%.
(a) Working with the updated estimates of market values and operating costs over the next four years, determine the remaining useful life of the old machine.
(b) Determine whether it is economical to make the replacement now.
Table P14.8
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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