Komatsu Cutting Technologies is considering replacing one of its CNC machines with one that is newer and more efficient. The firm purchased the CNC machine 10 years ago at a cost of $135,000. The machine had an expected economic life of 12 years at the time of purchase and an expected salvage value of $ 12,000 at the end of the 12 years. The original salvage estimate is still good, and the machine has a remaining useful life of two years. The firm can sell this old machine now to another firm in the industry for $30,000. The new machine can be purchased for $165,000, including installation costs. It has an estimated useful (economic) life of eight years. The new machine is expected to reduce cash operating expenses by $30,000 per year over its eight-year life, at the end of which the machine is estimated to be worth only $5,000. The company has a MARR of 12%.
(a) If you decided to retain the old machine, what is the opportunity (investment) cost of retaining the old asset?
(b) Compute the cash flows associated with retaining the old machine in years one and two.
(c) Compute the cash-flows associated with purchasing the new machine in years one through eight.
(d) If the firm needs the service of these machines for an indefinite period and no technology improvement is expected in future machines, what will be your decision?