CTI Corporation purchased a special-purpose turnkey stamping machine four years ago for $18,000. It was estimated at that time that this machine would have a life of 10 years and a salvage value of $4,000 with a removal cost of $1,500. These estimates are still good. This machine has annual operating costs of $3,000. A new machine, which is more efficient, will reduce the annual operating costs to $1,500 but will require an investment of $22,000, plus $2,000 for installation. The life of the new machine is estimated to be 12 years with a salvage value of $4,000 and a removal cost of $2,000. An offer of $7,000 has been made for the old machine, and the purchaser is willing to pay for its removal. Find the economic advantage of replacement or of continuing with the present machine. State any assumptions that you make. (Assume i = 12%.)
CTI Corporation purchased a special-purpose turnkey stamping machine four years ago for $18,000. It was estimated at that time that this machine would have a life of 10 years and a salvage value of $4,000 with a removal cost of $1,500. These estimates are still good. This machine has annual operating costs of $3,000. A new machine, which is more efficient, will reduce the annual operating costs to $1,500 but will require an investment of $22,000, plus $2,000 for installation. The life of the new machine is estimated to be 12 years with a salvage value of $4,000 and a removal cost of $2,000. An offer of $7,000 has been made for the old machine, and the purchaser is willing to pay for its removal. Find the economic advantage of replacement or of continuing with the present machine. State any assumptions that you make. (Assume i = 12%.)
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