Reference no: EM13151731

A foreman in a multi-year building construction project wants to evaluate whether to rebuild and repair five existing assets or replace them with four new assets that are more productive and capable of providing the same service as the current five machines. The four new assets can be acquired at time zero for a total cost of $240,000. The total maintenance, insurance and operating costs for the new equipment is $20,000 at year zero (now), $40,000 at year one, $50,000 at year 2 and $30,000 at year 3. The anticipated salvage for these assets after three years is $100,000. The alternative is to repair the existing machines for total cost of $50,000 at time zero (now). However this approach will realize much higher operating costs over the next three years. In addition to the repair cost, the total operating costs for the repaired assets is estimated at $20,000 at time zero but that escalates to $140,000 in each of years one and two and $70,000 in year three. The salvage for the existing assets after three years of service is anticipated to be zero. The used machines have no salvage value today in the market place due to their current condition. The desired minimum acceptable rate of return on invested capital is 15.0%. Which alternative is economically preferred.