A Manufacturer Is Considering the Replacement of One of Its

question 1

Essay

A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient
one. The relevant details for both defender and challenger are as follows:
· Old machine: The current book value of the old boring machine is $60,000, and it has a remaining useful
life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but
the company can sell the machine now to another firm in the industry for $13,000.
· New Machine: The new boring machine can be purchased at a price of $144,000 and has an estimated
useful life of seven years. It has an estimated salvage value of $40,000 and is expected to realize economic
savings on electric-power usage, labor, and repair costs and to reduce the amount of reworks. In total, annual
savings of $60,000 will be realized if the new machine is installed.
The firm uses a MARR of 15%. Using the opportunity-cost approach, address the following questions:
(a) What is the initial cash outlay required for the new machine?
(b) What are the cash flows for the defender in years zero to five?
(c) Should the firm purchase the new machine?

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Definitions:

Single Product

Refers to a business or production strategy focusing on the manufacture or sale of only one type of product.

Majority of Demand

Typically refers to the largest portion of demand for a product or service, usually indicating the most common or frequent customer request or need.

Tailored Postponement

A supply chain strategy that delays the final production or distribution of a product until customer requirements are fully understood.

Production

The process of creating goods and services through the combination of labor, materials, technologies, and strategies.