Machinery Replacement
Annual operating cost of old machine = 8
Cost of new machine
Year: 0 1 2 3 NPV @ 10%
15 5 5 5 27.4
Equivalent annual cost of new machine =
27.4/(3-year annuity factor) = 27.4/2.5 = 11
MORAL: Do not replace until operating cost
of old machine exceeds 11.