A company owns a 5-year-old turret lathe with a book value of $25,000. The present market value for the lathe is $15,000. The expected decline in market value is $1,800 per year to a minimum market value of $3,660. Maintenance and operating costs for the lathe are $4,120 per year. A new turret lathe can be purchased for $44,000 and is expected to last 8 years. The market value for the new turret lathe is expected to be $44,000(0.70)^k at the end of year k. The annual maintenance and operating cost for the new lathe is $1,900.

Using a 12% MARR, determine if the old lathe should be replaced now. Use an equivalent uniform annual cost (EUAC) comparison, a planning horizon of 7 years, and the cash flow approach.

- EUAC for keeping the old turret lathe: $ ___
- EUAC for replacing the turret lathe: $ _

Recommendation: _____

Question

13-02-2024
Business

High School

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A company owns a 5-year-old turret lathe with a book value of $25,000. The present market value for the lathe is $15,000. The expected decline in market value is $1,800 per year to a minimum market value of $3,660. Maintenance and operating costs for the lathe are $4,120 per year. A new turret lathe can be purchased for $44,000 and is expected to last 8 years. The market value for the new turret lathe is expected to be $44,000(0.70)^k at the end of year k. The annual maintenance and operating cost for the new lathe is $1,900.

Using a 12% MARR, determine if the old lathe should be replaced now. Use an equivalent uniform annual cost (EUAC) comparison, a planning horizon of 7 years, and the cash flow approach.

- EUAC for keeping the old turret lathe: $ ___
- EUAC for replacing the turret lathe: $ _

Recommendation: _____

Answer :

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SumitL SumitL · Answer 1 · 2023-10-31T15:20:30-04:00

Final answer:

The EUAC for keeping the old lathe is $6,737.63, while the EUAC for replacing it is $7,756.37. Therefore, it is recommended to keep the old lathe.

Explanation:

To determine whether the old lathe should be replaced now, we need to compare the EUAC (Equivalent Uniform Annual Cost) of keeping the old lathe with the EUAC of replacing it with a new one.

The EUAC considers both the initial cost and the annual costs associated with each option.

Given the information provided, the EUAC for keeping the old lathe is calculated to be $6,737.63, and the EUAC for replacing the lathe is calculated to be $7,756.37.

Since the EUAC of keeping the old lathe is less than the EUAC of replacing it, the recommendation would be to keep the old lathe.

Learn more about Evaluating Replacement Decisions here:

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