Mr Patel, a retired economist, owns a small store in Mumbai. In one corner of the store is a video-game machine. Ten years ago, it cost him Rs 5 000, but lately it has been breaking down more frequently. Last year he had to spend Rs 500 on repairs, and he expects the repair bill to go up by about 10% every year from now on. Also, it has been bringing in less money every year; he empties the coin box every month, and on average it contains about Rs 100. He expects the annual income to go down by Rs 100 every year from now on. If he got rid of the machine, he could use the space to stock more goods, and he expects this would increase his annual profit by Rs 500. But the machine is not worth anything as scrap, and he will have to pay Rs 200 to have it taken away. Mr Patel’s MARR is 10%. He carries out a replacement analysis, treating all the cash flows as discrete and annually compounded. What conclusion does he reach? Should he get rid of the machine in how many years?
Mr Patel, a retired economist, owns a small store in Mumbai. In one corner of the store is a video-game machine. Ten years ago, it cost him Rs 5 000, but lately it has been breaking down more frequently. Last year he had to spend Rs 500 on repairs, and he expects the repair bill to go up by about 10% every year from now on. Also, it has been bringing in less money every year; he empties the coin box every month, and on average it contains about Rs 100. He expects the annual income to go down by Rs 100 every year from now on. If he got rid of the machine, he could use the space to stock more goods, and
he expects this would increase his annual profit by Rs 500. But the machine is not worth anything as scrap, and he will have to pay Rs 200 to have it taken away. Mr Patel’s MARR is 10%.
He carries out a replacement analysis, treating all the cash flows as discrete and annually compounded. What conclusion does he reach? Should he get rid of the machine in how many years?
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