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3-23 A machine in use now has a zero net salvage value and is expected to have an additional two years of useful life but
3-23 A machine in use now has a zero net salvage value and is expected to have an additional two years of useful life but its service is needed for another 6 years. The operating costs with this machine are estimated to be $4,500 for the next year of use at year 1 and $5,500 at year 2. The salvage value will be 0 in two years. A replacement machine is estimated to cost $25,000 at year 2 with annual operating costs of $2,500 in its first year of use at year 3, increased by an arithmetic gradient series of $500 per year in following years. The salvage value is estimated to be $7,000 after 4 years of use (at year 6). An alternative is to replace the existing machine now with a new machine costing $21,000 and annual operating costs of $2,000 at year 1, increasing by an arithmetic gradient of $500 each following year. The salvage value is estimated to be $4,000 at the end of year 6. Compare the economics of these alternatives for a minimum ROR of 20% using a 6 year life by: A) Present worth cost analysis. B) Equivalent annual cost analysis. C) Incremental NPV analysis
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