What is the optimal replacement cycle for the new machine

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Reference no: EM13884969

Problem- Calculation Of Optimal Replacement Cycle For New Machine

Gillian is deciding whether to replace an old machine, and has assembled the following information:

 

Old Machine

New Machine

Life at purchase:

3 years

3 years

Remaining life:

1 year

3 years

Cost at purchase:

$9,000

$12,000

Depreciation (p.a.):

$3,000

$4,000

Revenue (p.a.)

$6,000

$7,000

Expenses-

year 1

year 2

year 3

$2,000

$1,000
$1,500
$2,250

Salvage Value

Book Value

Book Value


She believes that the second-hand market value of either machine will decline over time in line with the depreciation schedule (for example, the old machine should sell for $3,000 today). If there are no taxes, and Gillian's required rate of return is 15% p.a.:

i) What is the optimal replacement cycle for the new machine?

ii) Should the old machine be replaced now, or next year?

Additional information-

This problem relates to Finance and it discusses about calculation of optimal replacement cycle for new machine and when should the old machine be replaced.

Reference no: EM13884969

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