Five years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complexparts used in commercial and military aircraft worldwide. It cost $350,000, had an estimated life of 15 years,and O&M costs of $50,000 per year. It was originally thought to have a salvage value of $20,000 at the end of15 years but is now believed to have a remaining life of 5 years with no salvage value at that time. With businessbooming, the existing machine is no longer sufficient to meet production needs. It can be kept andsupplemented by purchasing a new, smaller Machine S for $210,000 that will cost $37,000 per year forO&M, have a life of 10 years, and a salvage value of $210,000(0.8t ) after t years. As an alternative, a larger,faster, and more capable Machine L can be used alone to replace the current machine. It has a cash pricewithout trade-in of $450,000, O&M costs of $74,000 per year, a salvage value of $450,000(0.8t) after t years,and a 15-year life. The present machine can be sold on the open market for a maximum of $70,000. MARR is 20percent, and the planning horizon is 5 years.a. Clearly show the cash flow profile for each alternative using a cash flow approach (insider’s viewpointapproach). (11.2.1)b. Using an EUAC and a cash flow approach (insider’s viewpoint approach), decide which is the more favorablealternative. (11.2.1)c. Clearly show the cash flow profile for each alternative using an opportunity cost approach (outsider’sviewpoint approach). (11.3.1)d. Using an EUAC comparison and an opportunity cost approach (outsider’s viewpoint approach), decidewhich is the more favorable alternative. (11.3.1

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Asked Nov 15, 2019
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Five years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complex
parts used in commercial and military aircraft worldwide. It cost $350,000, had an estimated life of 15 years,
and O&M costs of $50,000 per year. It was originally thought to have a salvage value of $20,000 at the end of
15 years but is now believed to have a remaining life of 5 years with no salvage value at that time. With business
booming, the existing machine is no longer sufficient to meet production needs. It can be kept and
supplemented by purchasing a new, smaller Machine S for $210,000 that will cost $37,000 per year for
O&M, have a life of 10 years, and a salvage value of $210,000(0.8t ) after t years. As an alternative, a larger,
faster, and more capable Machine L can be used alone to replace the current machine. It has a cash price
without trade-in of $450,000, O&M costs of $74,000 per year, a salvage value of $450,000(0.8t) after t years,
and a 15-year life. The present machine can be sold on the open market for a maximum of $70,000. MARR is 20
percent, and the planning horizon is 5 years.
a. Clearly show the cash flow profile for each alternative using a cash flow approach (insider’s viewpoint
approach). (11.2.1)
b. Using an EUAC and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable
alternative. (11.2.1)
c. Clearly show the cash flow profile for each alternative using an opportunity cost approach (outsider’s
viewpoint approach). (11.3.1)
d. Using an EUAC comparison and an opportunity cost approach (outsider’s viewpoint approach), decide
which is the more favorable alternative. (11.3.1

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a.

Calculation of Cash flow of both alternatives for 5 years using excel is as follows:

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Alternative 1 Alternative 2 Particulars Old Machine Machine L Machine S 3 Cost of Machine 4 0&M Cost of New Machine per year 5 O&M Cost of Old Machine per year -210000 -37000 50000 =B4+B5 -B3 0.8^5 -450000 -74000 10 -C4+C5 C3*0.8^5 0 -C6-C7-CS Total Cash Flow of 1-4 Years 6 7 Salvage Value of New Machine 8 Salvage Value of Old Machine B6-B7-BS 9 Total Cash Flow of 5th Year

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The result of the table...

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A B C Alternative 1 Alternative 2 1 Particulars Old Machine + Machine L Machine S 2 3 Cost of Machine 4 O&M Cost of New Machine per year 5 O&M Cost of Old Machine per year ($210,000.00) ($37,000.00) ($50,000.00) ($87,000.00) (S68,812.80) ($450,000.00) ($74,000.00) $0.00 ($74,000.00) ($147,456.00) 6 Total Cash Flow of 1-4 Years 7 Salvage Value of New Machine 8 Salvage Value of Old Machine $0.00 $0.00 ($18,187.20) $73,456.00 9 Total Cash Flow of 5th Year

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