Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Investment Decision Rules (20 Marks) James is trying to figure out the optimal number of years to replace his machinery. The machinery will be replaced

Investment Decision Rules (20 Marks)

James is trying to figure out the optimal number of years to replace his machinery. The machinery will be replaced continously for the foreseeable future. The machinery costs

$35,000. The maintenance costs for each respective year are shown in the table below together with the salvage value of the machinery if it were to be sold in that year. James has decided to keep the machinery for at least 4 years but is uncertain whether a 4 or 5 year replacement period is most appropriate. The discount rate is 10% per annum and assume zero taxes.

Year

0

1

2

3

4

5

Initial cost

-42,000

Maintenance costs

-2,800

-3,900

-5,000

-6,100

-7,200

Salvage value (if sold)

32,900

28,900

23,900

17,900

10,900

  1. Using annuity equivalent method, determine the best replacement period for James (consider only 4 or 5 years). (9 marks)
  2. Using perpetuity method, determine the best replacement period for James (consider only 4 or 5 years). Do you arrive with the same conclusion as part (a) above? Explain why? (6 marks)
  3. If the salvage value of the machinery in year 5 turns out to be $14,000 rather than $10,900 as you initially expected, would you recommend James to replace the machinery in 4 or 5 years? (5 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee

1st Edition

1607962233, 978-1607962236

More Books

Students also viewed these Finance questions

Question

=+7 What is the general make-up of the community? [residential/old]

Answered: 1 week ago

Question

What is job enlargement ?

Answered: 1 week ago

Question

what is the most common cause of preterm birth in twin pregnancies?

Answered: 1 week ago

Question

Which diagnostic test is most commonly used to confirm PROM?

Answered: 1 week ago

Question

What is the hallmark clinical feature of a molar pregnancy?

Answered: 1 week ago