A company is considering replacing a broken machine with a newer and more efficient one. However, if the old machine is repaired, it can be used for another five years, although the company does not expect any salvage value from scrapping at the end of five years. The company can sell the machine to another company in the industry now for $7,500. If the machine is kept, it will require an immediate $1,400 overhaul to restore it to operable condition. The overhaul will neither extend the service life originally estimated nor increase the value of the machine. 

The operating costs are estimated at $2,500 during the first year and are expected to increase by $1,000 per year thereafter. Future market values are expected to decline by $1,500 per year. The new machine costs $15,000 and will have operating costs of $1,500 in the first year, increasing by $1,000 per year thereafter. The expected salvage value is $10,000 after one year and will decline 15% each year. The company requires a rate of return of 12%.

 Find the economic life for each option and determine when the defender should be replaced.

Answer rating: 100% (QA)

Calculation of economic life of DefenderExisting machine Capital cost will be7500 1400cost of overha... View the full answer