Purchase Solution

Finance: Optimal replacement cycle for machinery and when it should be replaced.

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution

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.

Solution Preview

1) Optimal Replacement Cycle

Step 1: Find the Net Present Value (NPV) of the new machine for each of the 3 years.

NPV(n) = Current value + Cash Flow(1) +
Cash Flow(2) + Cash Flow(3) + ... +
Cash Flow(n) + Salvage Value(n)

where: Cash Flow = Revenue - Expenses
Salvage value = Current value - Depreciation

NPV(y1) = -12,000 + ...

Purchase this Solution

Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.