(Solution Download) The Plant Department of the local telephone company purchased four


The Plant Department of the local telephone company purchased four special pole hole diggers 8 years ago for $14,000 each. They have been in constant use to the present. Owing to an increased workload, additional machines will soon be required. Recently it was announced that an improved model of the digger has been put on the market. The new machines have a higher production rate and lower maintenance expense than the old machines, but will cost $32,000 each. The service life of the new machines is estimated to be 8 years, with salvage value estimated at $750 each. The four original diggers have an immediate salvage of $2000 each and an estimated salvage value of $500 each 8 years hence. The estimated average annual maintenance expense associated with the old machines is approximately $1500 each, compared with $600 each for the new machines.
A field study and trial indicate that the workload would require three additional new machines if the old machines are continued in service. However, if the old machines are all retired from service, the present workload plus the estimated increased load could be carried by six new machines with an annual savings of $12,000 in operation costs. A personnel training program to prepare employees to run the machines will be necessary at an estimated cost of $700 per new machine. If the MARR is 9% before taxes, what should the company do?

 







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