FIN201 Week 4 Class Presentation Questions

A company is considering the installation of a new machine at a cost of $60,000 to replace a machine purchased 7 years ago for $100,000. The disposal value of the old machine is $15,000. Both machines will have similar output and will produce work of identical quality. The estimated yearly costs of operating each machine are as follows:

Old Machine($)New Machine($)

Wages15,0005,000

Supplies, repairs, power5,0003,000

Insurance and miscellaneous 2,0003,000

Total 22,00011,000

Both machines have an estimated life of 3 years, at which time both machines will have an estimated disposal value of $5,000. Assume that:

a) The required rate of return is 10% per annum

b) The operating costs of the old machine and the new machine are incurred at the end of each year.

Should the company purchase the new machine, or continue to operate the old one? Show your workings.