Question

CONFIDENTIA BFF/BFM/151611/BFF1922 QUESTION 3 (25 MARKS) The projected market value and operation & maintenance (O&M) costs associated with a presently owned machine are shown in Table 3. An outside vendor of services has offered to provide the service of the existing machine at a fixed price per year. If the presently owned machine is replaced now, the cost of the fixed-price contract will be RM330,000 for each of the next 3 years. If the presently owned machine is replaced next year or the year after that, the contract price will be RM350,000 per year. Determine if and when the defender should be replaced with the outside vendor using an interest rate of 10% per year. Assume used equipment similar to the defender will always be available. Table 3. The projected market value and operation& maintenance (O&M) costs associated with a presently owned machine Market Value, RM 300,000 250,000 140,000 100,000 80,000 Year O&M Cost, RM per Year -240,000 -250,000 -260,000 QUESTION 4 (25 MARKS) Gambang Sdn Bhd, an overland freight company, has purchased new trailers for

Answer 1

For solving this question, we need to establish the gain/loss in each of the years, if the machine is replaced at year 0,1,2,3,4.

Year 0
Replacement Value	330000
Market Value	300000
Cumulative O&M Costs	0
Gain/(Loss)	30000

Year 1
Replacement Value	330000
Market Value	250000
Cumulative O&M Costs	240000
Gain/(Loss)	-160000

Year 2
Replacement Value	330000
Market Value	140000
Cumulative O&M Costs	490000
Gain/(Loss)	-300000

Year 3
Replacement Value	350000
Market Value	100000
Cumulative O&M Costs	750000
Gain/(Loss)	-500000

Year 4
Replacement Value	350000
Market Value	80000
Cumulative O&M Costs	750000
Gain/(Loss)	-480000

Since, it is seen from the above values, the cash flows or gain is positive in only if exchange now therefore, it is advised to replace machine now as in later years, the cost and market value would lead to losses.