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Evaluate the relative merits of replacing old control device

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Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $31,000 (delivered). An additional $2,000 will be needed to install the device. The new device has an estimated 18-year service life. The estimated salvage value at the end of 18 years will be $1,000. The new control device will be depreciated as a 7-year MACRS asset. The existing control device (original cost = $10,000) has been in use for 8 years, and it has been fully depreciated (that is, its book value equals zero). Its scrap value is estimated to be $1,500. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm's marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $15,000. The firm's cost of capital is 10 percent.

Problem 1: Evaluate the relative merits of replacing the old control device using the net present value approach.

Reference no: EM132960725

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