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Problem- Calculation Of Optimal Replacement Cycle For New Machine
Gillian is deciding whether to replace an old machine, and has assembled the following information:
Old Machine
New Machine
Life at purchase:
3 years
Remaining life:
1 year
Cost at purchase:
$9,000
$12,000
Depreciation (p.a.):
$3,000
$4,000
Revenue (p.a.)
$6,000
$7,000
Expenses-
year 1
year 2
year 3
$2,000
$1,000 $1,500 $2,250
Salvage Value
Book Value
She believes that the second-hand market value of either machine will decline over time in line with the depreciation schedule (for example, the old machine should sell for $3,000 today). If there are no taxes, and Gillian's required rate of return is 15% p.a.:
i) What is the optimal replacement cycle for the new machine?
ii) Should the old machine be replaced now, or next year?
Additional information-
This problem relates to Finance and it discusses about calculation of optimal replacement cycle for new machine and when should the old machine be replaced.
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