A firm owns a drilling equipment that it is contemplating replacing. It is believed that P1,500,000 could be obtained for the old equipment if it were sold now, but it can be productively used for four more years at which time its market value will be zero. The equipment has an operating and maintenance of P600,000 per year. The firm can purchase a new machine, with the same functionality as the current machine, for P5,500,000. In four years the market value of the new machine is estimated to be P2,275,000. Annual operating and maintenance costs will be P1,850,000 per year. Should the old drilling equipment be replaced using a before-tax MARR of 15% and a study period of four years?

A firm owns a drilling equipment that it is contemplating replacing. It is believed that P1,500,000 could be obtained for the old equipment if it were sold now, but it can be productively used for four more years at which time its market value will be zero. The equipment has an operating and maintenance of P600,000 per year. The firm can purchase a new machine, with the same functionality as the current machine, for P5,500,000. In four years the market value of the new machine is estimated to be P2,275,000. Annual operating and maintenance costs will be P1,850,000 per year. Should the old drilling equipment be replaced using a before-tax MARR of 15% and a study period of four years?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 4E

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