Wu Lighting Company is considering replacing an old, relatively inefficient vertical drill machine that was purchased 7 years ago at a cost of $10,000. The machine had an original expected life of 12 years and a zero estimated salvage value at the end of that period. The divisional manager reports that a new machine can be bought and installed for $12,000. Further, over its 5-year life, the machine will expand sales from $10,000 to $11,500 a year and will reduce the usage of labor and raw materials sufficiently to cut annual operating costs from $7,000 to $5,000. The new machine has an estimated salvage value of $2,000 at the end of its 5-year life.
The old machine’s current market value is $1,000; the firm’s MARR is 15%.
(a) Should the new machine be purchased now?
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(b) What current market value of the old machine would make the two options equal?