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Math Help - Economics Homework Help - Replacement Studies

  1. #1
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    Economics Homework Help - Replacement Studies

    Equipment purchased 2 years ago for $70,000 was expected to have a useful life of 5 years with a $5000 salvage value. Its performance was less than expected, and it was upgraded for $30,000 one year ago. Increased demand now requires that the equipment be upgraded again for an additional $25,000 or replaced with new equipment that will cost $85,000. If replaced, the existing equipment will be sold for $6000. In conducting a replacement study, the first cost that should be used for the presently owned machine is:
    Answer
    a.
    $31,000
    b.
    $6,000
    c.
    $25,000
    d.
    $22,000


    I selected b, but found that it was wrong, the correct answer is a (according to the text) Can someone shed some light on this.
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  2. #2
    Grand Panjandrum
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    Re: Economics Homework Help - Replacement Studies

    Quote Originally Posted by testing12 View Post
    Equipment purchased 2 years ago for $70,000 was expected to have a useful life of 5 years with a $5000 salvage value. Its performance was less than expected, and it was upgraded for $30,000 one year ago. Increased demand now requires that the equipment be upgraded again for an additional $25,000 or replaced with new equipment that will cost $85,000. If replaced, the existing equipment will be sold for $6000. In conducting a replacement study, the first cost that should be used for the presently owned machine is:
    Answer
    a.
    $31,000
    b.
    $6,000
    c.
    $25,000
    d.
    $22,000


    I selected b, but found that it was wrong, the correct answer is a (according to the text) Can someone shed some light on this.
    Did the question mention the discount rate to be used by any chance?

    CB
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