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Assignment 13 ISYE 620

The document contains information about the costs, salvage values, and operating costs of several pieces of equipment over multiple years. It asks the reader to determine the economically optimal decision of whether to retain existing equipment or replace it with new equipment based on net present value calculations using a 10% interest rate. Several examples are provided with varying costs, timelines, and replacement options that require calculating the equivalent annual worth to determine the best financial decision.

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Zoloft Zithromax Prozac
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342 views

Assignment 13 ISYE 620

The document contains information about the costs, salvage values, and operating costs of several pieces of equipment over multiple years. It asks the reader to determine the economically optimal decision of whether to retain existing equipment or replace it with new equipment based on net present value calculations using a 10% interest rate. Several examples are provided with varying costs, timelines, and replacement options that require calculating the equivalent annual worth to determine the best financial decision.

Uploaded by

Zoloft Zithromax Prozac
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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11.

14A piece of onboard equipment has a first cost of $600,000, an annual cost of $92,000, and a
salvage value that decreases to zero by $150,000 each year of the equipment’s maximum useful life of 5
years. Assume the company’s MARR is 10% per year. (a) Determine the ESL by hand. (b) Use a
spreadsheet with a graph indicating the capital recovery, AOC, and total AW per year to determine the
ESL.

11.26 State-of-the-art digital imaging equipment purchased 2 years ago for $50,000 had an expected
useful life of 5 years and a $5000 salvage value. After its installation the performance was poor, and it
was upgraded for $20,000 one year ago. Increased demand now requires another upgrade for an
additional $22,000 so that it can be used for 3 more years. Its new annual operating cost will be $27,000
with a $12,000 salvage after the 3 years. Alternatively, it can be replaced with new equipment costing
$65,000, an estimated AOC of $14,000, and an expected salvage of $23,000 after 3 years. If replaced
now, the existing equipment can be traded for only $7000. Use a MARR of 10% per year. (a) Determine
whether the company should retain or replace the defender now. (b) Based on the poor experience with
the current equipment, assume the person doing this analysis decides the challenger may be kept for
only 2 years, not 3, with the same AOC and salvage estimates for the 2 years. What is the decision?

Solution:

Given data:

Cost of the machine = $50,000

First year additional cost = $20,000

First year additional cost = $15,000

Annual operating cost = $27,000

Salvage value = $12,000

Rate of interest = 10%

Time = 5 years

Equivalent annual value

1 st year cos t 2 nd year cos t Salvage value

EUAC = {
(−Cost –
( 1+ R )1
−
( 1+ R )2
+
( 1+ R )T ) } – Annual equivalent cost
T
R ( 1+ R )
( ( 1+ R )T −1 )
20,000 15,000 12,000

={
(
−50,000 – − +
( 1+.1 )1 ( 1+.1 )2 ( 1+.1 )5 ) } –27,000
5
.1 ( 1+.1 )
( ( 1+.5 )5 −1 )
={(-50,000 – 18181.8181 – 12396.6942 + 7451.0558) / (.161051/.6105) } – 27,000
= (-19.298.32 – 27,000)

=-46,298.32

11.30 A presently owned machine has the projected market value and M&O costs shown below. An
outside vendor of services has offered to provide the service of the existing machine at a fixed price per
year. If the presently owned machine is replaced now, the cost of the fixed-price contract will be
$33,000 per year. If the presently owned machine is replaced next year or any time after that, the
contract price will be $35,000 per year. Determine if and when the defender should be replaced with
the outside vendor using an interest rate of 10% per year. Assume used equipment similar to the
defender will always be available, but that the current equipment will not be retained more than three
additional years.

Retention Year Market Value, $

M&O Cost,

11.32 The estimated future market values and M&O costs for an in-place backup generator at MediCare
Hospital and a possible replacement are shown below. Mrs. Jamison, Hospital Director, told you that she
is interested only in what happens over the next 3 years. If the current generator is to be replaced, it
must be done now or kept in-place for the 3 years. Using an interest rate of 10% per year and a 3-year
study period, determine whether or not the replacement is economically advantageous now.

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