Select one of the ageing plants in your organisation
Q5. Select one of the ageing plants in your organisation. Say, Machine X has been used for N years and currently has a book value of $M. A decision must be made concerning the most economic action to take: keep X, replace X with Y or replace X with Z. Where Y and Z have different price tag with different productivity. A before-tax analysis is to be performed.
If machine X is continued in service, it can be used for K years and scrapped at zero value.
Annual operating and maintenance costs will equal to $P.
If machine X is replaced with machine Y, a trade-in allowance of $Q will be provided for X.
The original purchase price for Y, excluding the trade-in allowance, is $R. At the end of the K year planning horizon, Y will have a salvage value of $S. Annual operating and maintenance costs will total $T.
If machine X is replaced with machine Z, no trade-in allowance will be provided for X.
The purchase price for Z is $U. At the end of the K-year planning horizon, Z will have a salvage value of $V. Annual operating and maintenance costs will total $W.
Using a MARR of 10% and a before-tax analysis, determine the preferred course of action for your asset plan with relevant costs and reasonable assumptions.
Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis.
Hint
Management "MARR or the minimum acceptable rate of return, or the hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects. Minimum Acceptable Rate of Return = Project value + Rate of interest for loans + Expected rate of inflation + Rate of inflati...
"MARR or the minimum acceptable rate of return, or the hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects.
Minimum Acceptable Rate of Return = Project value + Rate of interest for loans + Expected rate of inflation + Rate of inflation change + Loan default risk + Project risk
Before tax cash flow analysis is a key tool that a property investor uses before making an investment, to ensure a healthy bottom line by gauging the return on equity. Now, calculating the cash flow before taxes is a matter of determining the net operating income and deducting the debt service (the debt the investor is obligated to repay in connection with the investment property)."
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