Fahad owns a cement industry in Saudi Arabia. One of the machines at his industry was purchased nine years ago for SR 150,000.This machine has only five remaining service years with an operating & maintenance cost of SR 29,000 per year, and it can be sold for SR 26,000 by the end of the five years. The current market value of this machine is SR 35,000.

A new machine is being considered as a replacement for the old machine. The new machine will cost SR 120,000 with 15-years life, and the salvage value is given as: 350,0000.7t after (t) years of use. The needed operating and maintenance cost equal to 10,000 gradient series on a SR 20,000 base. The equipment supplier offers to allow a SR 40,000 trade-in for the old machine.

Fahad has a friend who is willing to lease a machine with the same standards, and it will cost SR 20,000 per year, payable at the beginning of the year, and this machine will have operating cost = 70% of the lease cost (payable at the end of the year).Using MARR of 15% compounded annually & 5 years planning horizon, answer the following questions using the Cash Flow Approach:

12. What is the EUAC of the old machine? (unit: SR)

a) 35,585b) 25,832c) 38,847d) 25,144

13. What is the EUAC of the new machine? (unit: SR)

a) 52,369b) 62,810c) 58,211d) 71,225

14. What is the EUAC of the leased machine? (unit: SR)

a) 37,000b) 21,985c) 35,000d) 26,559

15. Let's assume that the calculated EUACs for the old machine, the new machine and the lease are SR 130,000, SR 150,000 and SR 170,000; respectively, then what will be your recommendation for Fahad?

a) Keep the old machineb) Replace with the new machine c) Replace with the leased) Cannot be determined

16. The recommendation if we used the Opportunity Cost Approach would be ...

a) Different from the Cash Flow Approach.b) Same or different, we cannot tell without going through the calculations. c) Same as the Cash Flow Approach.d) Most likely the same, but it could be different.