Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 31

A 3-year-old machine purchased for $140,000 is not able to meet today's market demands. The machine can be upgraded now for $70,000 or sold to a subcontracting company for $40,000. The current machine will have an annual operating cost of $85,000 per year and a $30,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which will serve the company now and for at least 8 years, will cost $220,000. Its salvage value will be $50,000 for years 1 through 4; $20,000 after 5 years; and $10,000 thereafter. It will have an estimated operating cost of $65,000 per year. You want to perform an economic analysis at 15% per year using a 3-year planning horizon.
a) Should the company replace the presently owned machine now, or do it 3 years from now
b) Compare the capital recovery requirements for the replacement machine (challenger) over the study period and an expected life of 8 years.