Hydrochloric acid, which fumes at room temperatures, creates a very corrosive work environment. A mixing machine, working in this environment, is deteriorating fast and can be used for only one more year, at which time it will be scrapped. It was purchased 3 years ago for $88,000 and its operating cost for the next year is expected to be $63,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum trade-in value will make the challenger economically attractive?
Hydrochloric acid, which fumes at room temperatures, creates a very corrosive work environment. A mixing machine, working in this environment, is deteriorating fast and can be used for only one more year, at which time it will be scrapped. It was purchased 3 years ago for $88,000 and its operating cost for the next year is expected to be $63,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum trade-in value will make the challenger economically attractive?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P
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Hydrochloric acid, which fumes at room temperatures, creates a very corrosive work environment. A mixing machine, working in this environment, is deteriorating fast and can be used for only one more year, at which time it will be scrapped. It was purchased 3 years ago for $88,000 and its operating cost for the next year is expected to be $63,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum trade-in value will make the challenger economically attractive?
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