Question

Machine ‘A’ was purchased two years ago for $50,000; it was expected to have a useful life of 5 years with a $5000 salvage value. Since its performance was less than expected, it was upgraded for $20,000 one year ago. Increased demand now requires that machine “A” be upgraded again for $15,000 so that it can be used for 3 more years. Its annual operating cost will be $27,000 and it will have a $12,000 salvage after 3 years. Alternatively, it can be replaced with a new machine “B” costing $65,000, with operating costs of $14,000 per year and a salvage value of $23,000 after 3 years. Calculate the difference in the annual worth between the two machines (AW of “A” – AW of “B”), at an interest rate of 10% per year.