Your company bought a production line 5 years ago for $75,000. At that time, it was estimated to have a service life of 15 years and salvage at the end of its service life of $20,000 today. Your boss recently proposed to replace the production line with a modern production line expected to last 20 years and cost $120,000 today. This new production line could provide $10,000 savings in annual operating and maintenance costs, and have a salvage value of $30,000 at the end of 20 years. The seller of the new production line is willing to accept the old production line as trade-in for its current fair market value, which is $22,000 today. Your boss estimates that if the old production line is kept for 10 more years, its salvage value will be $15,000. If MARR is 8% per year, use replacement analysis to answer the following question: Should you keep the old production line or replace it with a new production line?

Your company bought a production line 5 years ago for $75,000. At that time, it was estimated to have a service life of 15 years and salvage at the end of its service life of $20,000 today. Your boss recently proposed to replace the production line with a modern production line expected to last 20 years and cost $120,000 today. This new production line could provide $10,000 savings in annual operating and maintenance costs, and have a salvage value of $30,000 at the end of 20 years. The seller of the new production line is willing to accept the old production line as trade-in for its current fair market value, which is $22,000 today. Your boss estimates that if the old production line is kept for 10 more years, its salvage value will be $15,000. If MARR is 8% per year, use replacement analysis to answer the following question: Should you keep the old production line or replace it with a new production line?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 15P

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