Technology improvement is expected in future machines

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Reference no: EM1312182

Q. Halifax Machine Tool Company is considering replacing one of its CNC machines with one that is newer also more efficient. The firm purchased the CNC machine 10 years ago at a cost of $135,000. It had an expected economic life of 12 years at the time of purchase also an expected salvage value of $12,000 at the end of the 12 years. The original salvage estimate is still good also the machine has a remaining economic life of 2 yr. Firm sell this old machine now to another firm in the industry for $30,000. A new machine can be purchased for $165,000, including installation costs. It has an estimated useful (economic) life of 8 years. The new machine is expected to reduce case operating expenses by $30,000 every year over economic life of 8 year. Finally from its useful life the machine is estimated to be worth only $5000. The company has a MARR of 12%.

(a) If you decided to retain the old machine, illustrate what is the opportunity (investment) cost of retaining the old asset?

(b) Calculate the cash flows associated with retaining the old machine in years 1 to 2.

(c) Calculate the cash flows associated with purchasing the new machine in years 1 to 8 (use the opportunity cost concept).

(d) If the firm needs the service of these machines for an indefinite period also no technology improvement is expected in future machines, illustrate what will be your decision?

Reference no: EM1312182

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