Problem-
A machine for shaping corkscrews tends to break down more often as it ages, producing less cork screws for sale, and costing more to maintain. What is the optimal replacement strategy for the machine given the following data:
|
Cost of new machine
|
$300
|
|
|
|
Age of machine (years)
|
1
|
2
|
3
|
|
Revenue ($)
|
340
|
280
|
200
|
|
Maintenance ($)
|
40
|
50
|
60
|
|
Scrap Value ($)
|
200
|
170
|
130
|
For tax purposes the corkscrew machine will be depreciated straight line over three years regardless of the replacement strategy adopted.
The tax rate is 30% and investors cannot claim franking credits. The corkscrew manufacturer requires a 10% pa. after tax return on investments.
Additional information-
The given problem belongs to Finance and discuss about optimal replacement strategy for a machine making corkscrews keeping in mind the tax rate.