A company is considering the purchase of a ‘new’ machine for their factory. The machine costs $10,000 to purchase and install. Maintenance costs will be $1,000 in the first year, then increasing by $3,000 per year thereafter (i.e. – maintenance costs in year 2 will be $4,000; in year 3 will be $7,000; etc.). Assume the machine it has a salvage value of zero once it has been purchased and installed. Assume an interest rate of 5%.
a) What are the economic life and the minimum equivalent uniform annual cost of the machine?
b) The company’s ‘old’ machine (i.e. – the machine that would be replaced by the ‘new’ machine) will have a maintenance cost of $8,000 this year (year 1) and is expected to increase. Assume a salvage value of zero. Should the company replace the ‘old’ machine with the ‘new’ machine? State the reason for your answer.
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