Question: ABC Company Purchased A Machine 6 Years Ago For $350,000. Last Year A Replacement Study Was Performed With The Decision To Retain The Machine For 2 More Years. However, This Year The Situation Has Changed. The Machine Is Estimated To Have A Value Of Only $8,000 Now And If It Is To Be Kept In Service, Upgrading At A Cost Of $50,000 Will Be Necessary …

ABC Company purchased a machine 6 years ago for $350,000. Last year a replacement study was performed with the decision to retain the machine for 2 more years. However, this year the situation has changed. The machine is estimated to have a value of only $8,000 now and if it is to be kept in service, upgrading at a cost of $50,000 will be necessary to make it useful for up to 2 more years. Operating cost is expected to be $10,000 the first year and $15,000 the second year, with no salvage value at all. Alternatively, the company can purchase a new machine with an ESL of 7 years, no salvage value, and an equivalent annual cost of $-55,540 per year. The MARR is 10% per year. Using the estimates above, determine a) When the company should replace the upgraded machine? b) The minimum future Salvage Value of a new machine necessary to indicate that purchasing now is economically advantageous to upgrading.