Question
Seaside Co. is considering the replacement of one of its welding machines. The existing machine can serve for a maximum of two more years and
Seaside Co. is considering the replacement of one of its welding machines. The existing machine can serve for a maximum of two more years and is expected to require a Maintenance and Operations Cost of 600$ in year 1 with an uncertain yearly increase of: 50$ per year with 50% probability, 100$ per year with 30% probability and 110$ per year with 20% probability. The existing machine has been upraised today and its market price is 2000$. The market value of the machine is expected to lose 200$ per year with a 20% probability, 250$ per year with 70% probability and 300$ a year with 10% probability over the course of its 2-year life. The best available replacement option is WELD321. A brand new WELD321 can be bought today for 15000$ and its price is expected to remain constant for the next 5 years. WELD321 can serve for a maximum of 10 years and its market value will drop by 1000$ for every year of service over the next 5 years. Its annual M&O costs are 300$ per year for the first two years of operation and 350$ per year for years 3 to 5 of operation and 500$ per year for years 6 to 10 of operation. When should Seaside Co. replace its existing welding machine given that Seaside Co. adopts a 5-year study period. Use an interest rate of 6% / year.
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