Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. A machine, working in that environment, is deteriorating fast and can be used for only 1 more year, at which time it will be scrapped with no salvage value. It was purchased 3 years ago for $88,000; its operating cost for the next year is expected to be $53,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum replacement value would render the challenger attractive?
Because it fumes at room temperatures, hydrochloric acid creates a very corrosive work environment. A machine, working in that environment, is deteriorating fast and can be used for only 1 more year, at which time it will be scrapped with no salvage value. It was purchased 3 years ago for $88,000; its operating cost for the next year is expected to be $53,000. A more corrosion-resistant challenger will cost $226,000 with an operating cost of $48,000 per year. It is expected to have a $60,000 salvage value after its 10-year ESL. At an interest rate of 15% per year, what minimum replacement value would render the challenger attractive?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Because it fumes at room temperatures, hydrochloric
acid creates a very corrosive work environment.
A machine, working in that environment, is deteriorating
fast and can be used for only 1 more year, at
which time it will be scrapped with no salvage
value. It was purchased 3 years ago for $88,000; its
operating cost for the next year is expected to be
$53,000. A more corrosion-resistant challenger
will cost $226,000 with an operating cost of
$48,000 per year. It is expected to have a $60,000
salvage value after its 10-year ESL. At an interest
rate of 15% per year, what minimum replacement
value would render the challenger attractive?
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