You Are Considering Whether to Replace an Existing Flow Meter

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.