Thread: 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.

Originally Posted by testing12

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