A large electronics manufacturing company is considering starting a new production line to replace an existing old production line. The firm has already sold the bonds to raise money for the project. The company plans to repay the bond holders $80,000 each year for 5 years and then redeems the bonds in year 5 for $1.3 million. In addition the project for which the bonds were issued is expected to last 10 years. It is projected to have a first year annual operating cost of $120,000 with a steady increase in cost each year of $30,000. The project's salvage value is estimated to be $130,000. The company's MARR is 15% per year. The company's current production line has a life expectancy of three more years with the following cost projections.
(Hint: Must use the "One more year Analysis")
|
Year
|
AOC
|
SV
|
|
0
|
$480,000 (one time overhaul)
|
|
|
1
|
$140,000
|
$120,000
|
|
2
|
$145,000
|
$100,000
|
|
3
|
$150,000
|
$90,000
|
Using Replacement Analysis, decide when the company should replace the old production line with the new one.
Please show cash flow diagram and all procedures.