Rework Problem 12.13 with the following additional information:

• The current book value of the old machine is $7,809. The anticipated book values for the next four years are as follows: year 1, $5,578; year 2, $3,347; year 3, $1,116; and year 4, $0.
• The new machine will be depreciated under a seven-year MACRS class.
• The company€™s marginal tax rate is 35%, and the firm uses an after-tax MARR of 10%.

Data From Problem 12.13

A firm is considering replacing a machine that has been used for making a certain kind of packaging material. The new machine will cost $31,000 and will have an estimated economic life of 10 years with a salvage value of $2,500. Operating costs are expected to be $1,000 per year throughout its service life. The machine currently in use had an original cost of $25,000 four years ago, and its service life (physical life) at the time of purchase was estimated to be seven years with a salvage value of $5,000. This machine has a current market value of $7,700. If the firm retains the old machine, its updated market values and operating costs for the next four years will be as follows:

The firm€™s minimum attractive rate of return is 12%.
(a) Working with the updated estimates of market values and operating costs over the next four years, determine the remaining useful life of the old machine.
(b) Determine whether it is economical to make the replacement now.
(c) If the firm€™s decision in part (b) is to replace the old machine, when should the replacement occur?

Transcribed Image Text:

Year End Book Value Operating Costs Market Value $7,809 $7,700 $3,200 $3,700 $4,800 $5,850 $4,300 $3,300 $5,578 $3,347 3 $1,100 $1,116 4 $0 $0