Eight years ago, a firm purchased a lathe for $45,000. The operating expenses for the lathe are

Question:

Eight years ago, a firm purchased a lathe for $45,000. The operating expenses for the lathe are $8,700 per year. An equipment vendor offers the firm a new machine for $53,500 with operating costs of $5,700 per year. An allowance of $8,500 would be made for the old machine on the purchase of the new one. The old machine was expected to be scrapped at the end of five years. The new machine’s economic service life is five years with a salvage value of $12,000. The new machine’s O&M cost is estimated to be $4,200 for the first year, increasing at an annual rate of $500 thereafter. The firm’s MARR is 12%. Which option would you recommend?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...

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