Business Homework Solutions
#1676
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?
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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