Question
The XYZ Company purchased a specialized machine three years ago for $25,000. This machine is not readily resalable and thus assumed to have a salvage
The XYZ Company purchased a specialized machine three years ago for $25,000. This machine is not readily resalable and thus assumed to have a salvage value of $0. Operating costs are expected to be $10,000 next year and to increase by $800 per year thereafter (the G term). The company has an opportunity to replace this machine with another specialized one for a cost of $12,000. This machine also has no salvage value, a useful life of 10 years, and annual operating costs of $5,000 the first year with annual increases of $1200 thereafter. The minimum acceptable rate of return that this company uses is 15%, thus use this rate. Should the company replace the old machine with the new one, or if not now when might be the best year? Base this determination on a comparison of the Equivalent Uniform Annual Cost, or EUAC.
First: Is the consideration of the $25,000 for the initial machine purchase relevant to this discussion?
What other observations or commentary?
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