... The machine originally cost GH¢45,000 five years ago. Its realisable value is currently GH¢8,000 (because a special opportunity for sale had arisen), but it would be zero at all subsequent times. If the machine were to be used for two more years, it would require a major overhaul at a cost of GH¢9,000 at the end of one year.
A new model of the machine is now being marketed. It costs GH¢40,000 and has a maximum life of ten years, provided that special maintenance is undertaken at a cost of GH¢20,000 after eight years. The new model would have no realisable at any time. Assume that no other new models are expected to become available in the foreseeable future, and that no changes are expected in costs or demand for output of the machine.
Demeter’s cost of capital is 15% per annum.
Prepare calculations to show whether Demeter’s existing machine should be replaced now, or after one or two years