Case Scenario:
A company has a metal bending machine and is considering a replacement for the machine. If repaired, the existing machine can be used for another 5 years. The existing machine will have no salvage value at the end of 5 years if kept for that period; however, the firm can sell the existing machine today to another firm for $4,500. If the existing machine is kept, it will require an immediate $1,000 overhaul to enable continued operation. (The overhaul will not extend the service life beyond 5 years or increase the value of the existing machine). Operating costs for the existing machine are estimated at $1,500 for the first year and will increase by $500 each year after the first.
A new model will cost $10,000 and will have operating costs of $1,500 for the first year. For each additional year (after the first year) the new machine is used, its operating costs will increase by $750 over the previous year's operating costs. The new machine's salvage value is $7,500 after one year and declines by 15% from the previous year's salvage value each year.
The firm's MARR is 10%. Should the existing metal bending machine be replaced now?