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:

NCI

An acronym for Non-Controlling Interest, representing minority ownership in an enterprise, where the owner does not have significant control over the company’s operations.

Dividend

A distribution of profits by a corporation to its shareholders, usually in the form of cash or additional shares.

Indirect NCI

Non-controlling interest (NCI) that is not directly held but is influenced through another subsidiary, affecting the parent company's consolidation process and equity valuation.

Direct NCI

Direct Non-Controlling Interest refers to the percentage of equity in a subsidiary not held by the parent company, directly showcasing the minority shareholders' stake in the profits and losses.