1. Replacement HW Problem
Two years ago, an automated testing machine was installed to monitor product quality. The equipment costs $25,000 and is capable of testing 400 units per day at a total operation and maintenance cost of $0.26 per unit. Product sales have now increased to the point that it is necessary to increase production to 700 units per day and the company must choose between replacing the current equipment or buying an additional machine of the same type.
A larger machine with a capacity of 800 units per shift would cost $45,000 and have operating and maintenance costs of $0.22 per unit. An equipment supplier has offered a $10,000 trade-in for the existing equipment on the high-capacity unit.
A new 400 unit per shift machine would cost $27,000 and have inspection costs identical to the existing machine.
It is expected that all testing equipment will be required for five more years, at which time the salvage value will be approximately equal to 10% of the first cost.
Assuming the company continues on a single shift, 250 days-per year operation, determine which alternative should be selected using a MARR of 20% per year, compounded annually.