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Present value and equivalent annual cost of the new machine

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XYZ Ltd. must decide whether to replace an existing machine. The company do not currently pay taxes. The replacement machine costs $10000 now and requires maintenance of $900 at the end of every year for eight years. At the end of 8 years the machine would be sold for $2500 (after any taxes). The existing machine requires increasing amounts of maintenance at the end of each year and its salvage value falls each year as shown:

Year Maintenance Cost ($) After-tax Salvage Value

0 0 3000
1 800 2400
2 1600 1200
3 3200 800
4 4000 0

The existing machine will last 4 more years before it falls apart (i.e. salvage value at the end of year 4 is zero). The company has a required rate of return of 12%.

A. Calculate the present value and equivalent annual cost of the new machine.

B. Calculate the cost of keeping the old machine for 1 year and then replacing it.

C. Recommend the best course of action for ABC Ltd, explaining your answer.

Reference no: EM132675966

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