All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money.Q. Now suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum one-time equipment cost that TechGuide would be willing to pay to replace rather than upgrade the old equipment? The TechGuide Company producesand sells 7,500 modular computer desks per year at a selling price of $750 each. Its current productionequipment, purchased for $1,800,000 and with a five-year useful life, is only two years old. It has a terminaldisposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal priceof $450,000. However, the emergence of a new molding technology has led TechGuide to consider either up-grading or replacing the production equipment. The following table presents data for the two alternatives:HomeInsertPage LayoutFormulasDataReviewUpgrade$3,000,000Replace$4,800,0002 One-time equipment costs3 Variable manufacturing cost per desk4 Remaining useful life of equipment (in years)5 Terminal disposal value of equipment15075332424

Answered: The TechGuide Company produces and…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

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ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

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All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money.

Q. Now suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum one-time equipment cost that TechGuide would be willing to pay to replace rather than upgrade the old equipment?

The TechGuide Company produces
and sells 7,500 modular computer desks per year at a selling price of $750 each. Its current production
equipment, purchased for $1,800,000 and with a five-year useful life, is only two years old. It has a terminal
disposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal price
of $450,000. However, the emergence of a new molding technology has led TechGuide to consider either up-
grading or replacing the production equipment. The following table presents data for the two alternatives:
Home
Insert
Page Layout
Formulas
Data
Review
Upgrade
$3,000,000
Replace
$4,800,000
2 One-time equipment costs
3 Variable manufacturing cost per desk
4 Remaining useful life of equipment (in years)
5 Terminal disposal value of equipment
150
75
3
3
24
24

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