You Are Considering Whether to Replace an Existing Flow Meter

question 48

Essay

You are considering whether to replace an existing flow meter. The existing meter can be sold now for $50 or it can be sold in 1 year for $10. It costs $30 per year to operate and maintain. A new meter costs $400 and has a 10-year life. It could be sold for $40 at the end of its life. The new meter costs $14 per year to operate and maintain. What do you recommend if the cost of capital is 12%?
A._12,10 - $40/(1.12)¹⁰ = $471.87; $4
71.87/5.65 = $83.51
Because the cost of keeping the old machine is less than the cost of the new machine, the old machine should not be replaced.

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Definitions:

Appeasement

A diplomatic policy aimed at avoiding conflict by making concessions to another nation.

U.S. Air Forces

The aerial warfare service branch of the United States Armed Forces, responsible for conducting air operations in defense of the country and its interests.

Nazi-Soviet Nonaggression Pact

An agreement signed in 1939 between Nazi Germany and the Soviet Union, promising not to engage in military action against each other, which was broken when Nazi Germany invaded the Soviet Union in 1941.