Example problem on replacement of an asset - 1
Example problem on replacement of an asset - 1
Two
years ago, a machine was purchased at a cost of Rs. 2,50,000 to be useful for
eight years. Its salvage value at the end of its life is Rs. 25,000. The annual
maintenance cost is Rs. 20,000. The market value of the present machine is Rs. 1,25,000. Now,
a new machine to cater to
the need of the present machine is
available at Rs. 1,75,000 to be useful
for six years. Its annual maintenance cost is Rs. 5,000. The salvage value of
the new machine is Rs. 20,000. Using an interest rate of 12%, find whether it
is worth replacing the present machine with the new machine.
Given data
Present machine
Purchase
price = ₹. 2,50,000
Present
value (P) = ₹. 1,25,000
Salvage
value (F) = ₹. 25,000
Annual
maintenance cost (A) = ₹. 20,000
Remaining
life = 6 years
Interest
rate = 12%
New machine
Purchase
price = ₹. 1,75,000
Salvage
value (F) = ₹. 20,000
Annual
maintenance cost (A) = ₹. 5,000
Useful
life = 6 years
Interest
rate = 12%
Formula used
AE(i)
= [(P – F )*(A/P, i, n)] + (F*i) + A
Solution
Present machine
AE(12%)Present = [(P – F)*(A/P, 12%, 6)] + (F*i) + A
= [(1,25,000 – 25,000)*(0.2432)] + (25,000*0.12)
+ 20,000
= [1,00,000*0.2432]+ (25,000*0.12) +
20,000
= 24,320 + 3,000 + 20,000
AE(12%)Present = ₹.
47,320
New machine
AE(12%)New = [(P –
F)*(A/P, 12%, 6)] + (F*i) + A
= [(1,75,000 – 20,000)*(0.2432)] +
(20,000*0.12) + 5,000
= [1,55,000*0.2432] + (20,000*0.12) + 5,000
= 37,696 + 2,400 + 5,000
AE(12%)New = ₹. 45,096
