QUESTION 3 [40 MARKS]

Denzo Eectronics purchased a machine 3 years ago to be used in the assembly line. However, due to rapidly changing technology, a new updated version is available in the markets. You are asked by the management to perform a replacement study this year and each year in the future, if need be. The MARR is 10% and information relate to those machines are as follows:

Defender	Current market value: RM95,000 and decreasing by 20% per year Estimated retention period: 3 years Estimated annual operating costs: RM18,200 next year, increasing by RM5,000 per year thereafter
Challenger	Price: RM280,000 and decreasing by 20% per year Estimated retention period: 6 years Estimated annual operating costs are as follows: Year 1 RM7,000 Year 2 RM7,000 Year 3 RM8,200 Year 4 RM8,200 Year 5 RM9,600 Year 6 RM9,600 Estimated major maintenance service in year 6 : RM35,000

Required:

(a) Explain what is the meaning of defender and challenger in replacement analysis.

[4 Marks]

1. (i) Determine the economic service lives for the defender and challenger.

[16 Marks]

(ii) Should the defender be replaced?

[4 Marks]

(c) After 1 year, the expected market value for the defender is still $76,000 this year. However due to unforeseen circumstances, the value is expected to drop by RM20,000 in year 1 and RM25,000 in year 2. On the other hand, the operating and maintenance cost of the machine is expected to double from the estimated figures made earlier for each of the remaining service life. Perform the follow-up analysis and give your suggestion to the management. [16 Marks]