Searching for ways to cut costs and increase profit, one of the industrial engineers at Home Comfort Furniture Manufacturers, Inc. determined that the equivalent annual worth of an existing machine over its remaining useful life of 2 years is $70,000 per year. The IE also determined that used machines like the one currently in use are not available any longer, but the defender can be replaced with a challenger that is more advanced. It will have an AW of $80,000 if it is kept for 2 years or less, $75,000 if it is kept between 3 and 4 years, and $65,000 if it is kept for 5 to 10 years. If the company uses a specified 3-year planning horizon and an interest rate of 15% per year, determine (a) when the company should replace the machine, and (b) the AW for the next 3 years.
Searching for ways to cut costs and increase
profit, one of the industrial engineers at Home
Comfort Furniture Manufacturers, Inc. determined
that the equivalent annual worth of an existing
machine over its remaining useful life of 2
years is $70,000 per year. The IE also determined
that used machines like the one currently in use are not available any longer, but the defender can
be replaced with a challenger that is more advanced.
It will have an AW of $80,000 if it is
kept for 2 years or less, $75,000 if it is kept between
3 and 4 years, and $65,000 if it is kept for
5 to 10 years. If the company uses a specified
3-year planning horizon and an interest rate of
15% per year, determine (a) when the company
should replace the machine, and (b) the AW for
the next 3 years.
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