Question: A 5 year old machine having original cost $10000 has a book value of $6000 at the end of one-half of its expected economic life.

A 5 year old machine having original cost $10000 has a book value of $6000 at the end of one-half of its expected economic life. Estimated operating costs for next year will amount to $5000. An equipment dealer will allow $4000 if he machine is traded in now and $3000 if it is traded in 1 year later. The dealer proposes the purchase of a new machine to perform the same function with cost $15000 installed. This new machine will have an estimated operating cost of $5000 per year and a salvage value of $4000 at the end of 4 years. Is it profitable to replace the existing machine now if the minimum return on investments is 15% before taxes?

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