Question

A company is considering replacing a machine that was bought six years ago for $45,000. The machine, however, can be repaired and its life extended five more years. If the current machine is replaced, the new machine will cost $43,000 and will reduce the operating expenses by $5,500 per year. The seller of the new machine has offered a trade-in allowance of $15,000 for the old machine. If MARR is 8% per year before taxes, how much can the company spend to repair the existing machine? 5 Click the icon to view the interest and annuity table for discrete compounding when MARR = 8% per year. Choose the closest answer below. O A. $500 O B. $6,040 OC. $21,040 O D. $49,960

Answer 1

Answer:

Option (B) $6040 is correct

The amount of repair that company could spend on repair on existing machine is maximum $ 6040 (not more than this amount).

The explanation is as follows:

The present value of cost icnurred on new machine (taken for four years)

Net initial investment in new machine after adjusting trade-in value ($ 43000-$15000) = ($28000)

Present value of savings in expense for four years (i.e. $ 5500* Annutiy factor for 5 years @8% i.e 3.9927)= $21960

Therefore, present value of cash outflow from new machine:                                                         ($ 6040)

Therefore, the company can plane to spend maximum of $ 6040 on repairs on existing machine. Otherwise, the best option is to replace it with the new machine.