the company ABC Inc. bought a machine for automatic playback of " software " at a cost of $ 20,000 ( the "original cost" ) . The expectation was that the machine had a useful life of 5 years , after which have a residual value of $ 5,000 ( "salvage value" ) .
The machine has required more maintenance than expected. In the past year the company spent $ 5,000 in major repairs ( " overhaul costs" ) . Even the estimated residual value is set down, and now it is understood that it would be only $ 2.500 at the end of the remaining useful ( "salvage value" ) . The operation and maintenance costs are at a level of $ 8,000 per year ( " O & M expenses" ) .
The company has found that the current market value of the machine , with 3 years of life yet to pay , is $ 10,000 ( "market value" ) . If this machine retains (rather than replace it ) these $ 10,000 would be an "opportunity cost " , that is , revenues that failed to receive by opting to retain the team . In this regard it would be equivalent to the " required investment " to retain the equipment.
A company is offering you the opportunity to purchase another machine for $ 15,000. During its expected useful life of 3 years , this machine should reduce operational costs and maintenance ("O & M expenses" ) of the current level of $ 8,000 to $ 6,000. It is estimated that after 3 years , the machine can be sold for about $ 5,500 (A "salvage value" ) . If the new machine would be bought, the current machine would be sold to another company.
Suppose ABC company will need this capacity of production (with the current or new equipment ) for only 3 years. Suppose further that there is certainty that during that period superior alternative will not arise. Given a 12 % MARR , is it justified to replace the current team now?
For its determination , use the method of "equivalent annual cost " or AEC ( 12%).
Note: AEC(12%) = AEC al 12%
Questions:
1. Which of the above costs and values mentioned are irrelevant to our analysis?
3. What are the values ??of AEC-Defender (12%) and AEC-Challenger (12%)?
4. Should the replacement be done now?