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Optimal Replacement Strategy For A Machine

Question

A machine for shaping corkscrews tends to break down more often as it ages, producing less cork screws for sale, and costing more to maintain. What is the optimal replacement strategy for the machine given the following data:

Cost of new machine

$300

 

 

Age of machine (years)

1

2

3

Revenue ($)

340

280

200

Maintenance ($)

40

50

60

Scrap Value ($)

200

170

130

 

For tax purposes the corkscrew machine will be depreciated straight line over three years regardless of the replacement strategy adopted. The tax rate is 30% and investors cannot claim franking credits. The corkscrew manufacturer requires a 10% pa. after tax return on investments.

 

Summary

The question belongs to Finance and it discusses about optimal replacement strategy for a machine making corkscrews keeping in mind the tax rate.

Total Word Count 58

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Comments

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    Giuseppe

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