Determine when a replacement decision should be made

Reference no: EM13220087

A defender asset was purchased 4 years ago for $125,000 with a 10 year useful life and has a current market value of $84,000. It is estimated that the defender's market value will decrease by $14,000 per year over the next 6 years. Operating expenses will be $18,000 in year 5 and will increase by $2,000 per year over the last 5 years. The asset has a $0 salvage value at the end of its 10 year life. A challenger asset with a useful life of 7 years can be purchased today for $85,000 and has estimated operating and maintenance expenses as follows: Year O&M Expense 1 $27,000 2 $27,000 3 $29,000 4 $31,000 5 $34,500 6 $37,000 7 $39,500 The challenger has a $0 salvage value at the end of its useful life. Both assets are depreciated as MACRS GDS 7-year property class. The company uses 15% MARR before tax to evaluate projects. Perform before-tax opportunity cost replacement analysis by the textbook method to determine when, if at all, a replacement decision should be made.

Reference no: EM13220087

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