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  • 1. MODULE 13C REPLACEMENT PROJECT OBJECTIVE: A frequent problem confronting a decision maker is whether or not to replace a piece of equipment which is still operating but can be replaced with new, more efficient equipment. This program will determine which of the two machines has a higher net present value, thus showing if the old equipment should be replaced. ASSUMPTIONS: A number of important assumptions must be made in order for this program to run successfully. First of all, the life of the new machine and the remaining life of the old machine are assumed to be equal. Also, straight-line depreciation for the remaining life is assumed for both machines. Finally, it is assumed that if the new machine is bought, the old machine will be sold at its market value. INPUTS (will appear in blue): Old machine: The inputs for the old machine include the present net book value (D39), its remaining useful life (D40), the annual sales produced (D41) (if sales are the same for both machines, zero can be entered), annual operating costs (D42), current resale value (D43) and end-of-life salvage value (D44). New machine: The new machine inputs are the purchase price of the new asset (D47), its annual sales (D48) (if different from old machine, otherwise enter zero), annual operating expenses (D49) and end-of-life salvage value (D50). Other: In addition, tax rate (D52) and cost of capital (D53), entered as decimals, are required. REPLACEMENT PROBLEM Sample data have been entered as an example. Old machine: Net Book Value 55000 Remaining life (years) 5 Annual sales 0 Annual expenses 45000 Resale value now 30000 End-of-life salvage value 2000 New machine: Purchase price 45000 Annual sales 0
  • 2. Annual expenses 26500 End-of-life salvage value 0 Income tax rate (decimals) 45.0% Cost of capital (decimals) 12.0% Keep old machine PV of sales 0 PV of expenses 162215 PV of contribution (A.T.) -89218 PV of depreciation (A.T.) 17844 PV of salvage 624 Net present value of old machine -70750 Buy new machine PV of sales 0 PV of expenses 95527 PV of contribution (A.T.) -52540 PV of depreciaton (A.T.) 14599 Original investment -45000 Resale value of old 30000 Tax(or refund) on sale of old 11250 PV of salvage 0 Net present value of new machine -41690 Advantage (disadv) of new machine 29060