Finance: Optimal replacement cycle for machinery and when it should be replaced.
Gillian is deciding whether to replace an old machine, and has assembled some information (refer to attachment File #1). She believes that the second-hand market value of either machine will decline over time in line with the depreciation schedule (eg. the old machine should sell for $3,000 today). If there are no taxes, and Gillian's required rate of return is 15% p.a.:
1) What is the optimal replacement cycle for the new machine?
2) Should the old machine be replaced now or next year?
where: Cash Flow = Revenue - Expenses
Salvage value = Current value - Depreciation
NPV(y1) = -12,000 + ...
Solution Summary
Gillian is deciding whether to replace an old machine. Using NPV analysis, the solution calculates the optimal replacement cycle and projects when the machine should be replaced.
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