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Compute the present worth of initial cost and repairs

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You purchased machine A one year ago at a cost of $2,000. You planned to use the machine for 5 years (its useful life) and will need a machine for this function, for the indefinitely long term. However, it has not performed properly and costs $200 per month for repairs, adjustments, and shutdowns. Machine B performs the same functions, but you are confident that it will cost $50 per month for repairs, adjustments, and shutdowns. It costs $3,500.

a. Using an 8% annual interest rate, compute the present worth of initial cost and repairs, adjustments, and shutdowns for both machine A and machine B.

b. Using an 8% annual interest rate, compute the incremental annual net equivalent value of machine B compared with machine A.

c. At this same interest rate, what is the most that machine B repairs could cost per month before it is not an economically justified replacement for machine A.

Reference no: EM131957049

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