Problem- Calculation Of Optimal Replacement Cycle For New Machine
Gillian is deciding whether to replace an old machine, and has assembled the following information:
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Old Machine
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New Machine
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Life at purchase:
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3 years
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3 years
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Remaining life:
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1 year
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3 years
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Cost at purchase:
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$9,000
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$12,000
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Depreciation (p.a.):
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$3,000
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$4,000
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Revenue (p.a.)
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$6,000
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$7,000
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Expenses-
year 1
year 2
year 3
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$2,000
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$1,000
$1,500
$2,250
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Salvage Value
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Book Value
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Book Value
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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.