Reference no: EM13299237
A 2-year old injection molding machine was expected to a serve out its projected life of 5 years, but a challenger promises to be more efficient and have a lower operating costs. You have been asked to perform an AW evaluation to determine if it is economically attractive to replace the defender now or to keep it for 3 more years as orignally planned. The defender had a first cost of $300,000, but its market value now is only $100,000. It has chargeable expenses of $120,000 per year and no expected salvage value. To simplify calculations, assume that SL depreciation was charged at $60,000 per year, and that it will continue at that rate for the next 3 years. The challenger will cost $240,000; have no slavage value after its 3-year life; have chargeable expenses of $30,000 per year, and be a SL-depreciated at $140,000 per year (again, for simplicity). Assume the company's effective tax rate is 35% and its after-tax MARR is 15% per year. Since GI is not estimated, all taxes are negative and considered "savings" to the alternative.
a. Detremine the CFAT in year 0 for the challenger and defender. (Hint: check for DR, CG, and CL.)
b. Determine the CFAT in years 1,2, and 3 for the challenger and defender.
c. Conduct he replacement study to determine if the defender should be kept for 3 more years or replaced now.
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