A company's management is considering to buying a new machine. A new machine will cost $25,000....

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Economics

A company's management is considering to buying a new machine. Anew machine will cost $25,000. Annual operating and maintenancecosts will be $8,000 in the first year, increasing by $400 eachyear. Assume the machine depreciates by $4,000 per year accordingto straight-line depreciation. Assume the machine can be re-sold atits book value at any time.
a) Owning the proposed new machine for how many years willresult in the minimum EAC if the interest rate is 8%? (showsteps)
b) If the old machine reached its minimum EAC several years agoand its operating and maintenance cost this year are expected to be$9,000, should the arenaâ€™s management buy the new machine? Assumethe operating and maintenance costs of the old machine willincrease, and assume it has a salvage value of zero.

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3.6 Ratings (494 Votes)

New machine cost25000Opex 1st year8000Growth in Opex per year400Schedule of machineYear 1Year 2Year 3Year 4Year 5Year 6Beginning balance of machine2500021000170001300090005000Less Depreciation400040004000400040004000Closing balance of machine210001700013000900050001000Suppose it is sold in See Answer

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