You are considering replacing an existing machine that will last for eight years with a newer, more efficient machine that will also last for eight years. You would sell the existing machine for $30,000 today if you purchased the new machine for $250,000. The old machine would cost you $80,000 per year to operate while the new machine would only cost you $35,000 per year to operate. At the end of eight years, the old machine would be worth only $10,000, while you could sell the more efficient machine for $35,000 at that time. Ignore income taxes!!
1. Using Net Present Value (NPV) analysis, should you replace the old machine with the more efficient machine if your required rate of return is 12% per year?
2. At what required rate of return would you be indifferent between the two choices?
3. What is the Equivalent Uniform Annual Cost (EUAC) of operating the existing machine for the next eight years at 12% per annum?
4. What is the Equivalent Uniform Annual Cost (EUAC) of operating the newer, more efficient, machine for the next eight years at 12% per annum?
5. What is the present value (at 12%) of the difference between the two EUAC’s that you just computed in parts a and b?