Quintana Electronic Company is considering the purchase of new robot-welding equipment to perform operations currently being performed by less efficient equipment. The new machine's purchase price is $150,000, delivered and installed. A Quintana industrial engineer estimates that the new equipment will produce savings of $30,000 in labor and other direct costs annually, as compared with the present equipment. He estimates the proposed equipment's economic life at 10 years, with a zero salvage value. The present equipment is in good working order and will last, physically, for at least 10 more years. Quintana uses a 10% discount rate for analysis.
(a) Assuming that the present equipment has a zero current market value, should the company buy the proposed equipment?
(b) Assume that the new equipment will save only $15,000 a year, but that its economic life is expected to be 12 years. If other conditions are as described in (a) above, should the company buy the proposed equipment?