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Tutorial (Replacement Analysis)

The document outlines a tutorial on replacement analysis involving cost comparisons between existing and new machines over specified timeframes. It includes calculations for economic service life, equivalent uniform annual costs, and a decision-making approach using the Annual Equivalent Cost (AEC) method. Additionally, it presents two options for replacing a broken inspection machine, detailing costs, operating expenses, and salvage values for both the old and new machines.

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6 views

Tutorial (Replacement Analysis)

The document outlines a tutorial on replacement analysis involving cost comparisons between existing and new machines over specified timeframes. It includes calculations for economic service life, equivalent uniform annual costs, and a decision-making approach using the Annual Equivalent Cost (AEC) method. Additionally, it presents two options for replacing a broken inspection machine, detailing costs, operating expenses, and salvage values for both the old and new machines.

Uploaded by

078bce004.aakriti
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Replacement analysis

TUTORIAL

1. Suppose a company has a forklift but is considering purchasing a new electric-lift truck that
would cost Rs.18,000 and have operating costs of Rs.3,000 in the first year. For the
remaining years, operating costs increase each year by 15% over the previous year’s
operating costs. Similarly, the salvage value declines each year by 20% from the previous
year’s salvage value. The lift truck has a maximum life of eight years. The firm’s required
rate of return is 12% before tax. Find the economic service life of this new machine.
2. Current market value of an old machine is Rs. 10000 and decreases by Rs. 2,000 per year.
Its operating cost if Rs. 2500 in year 1 and increase by 20% each year for 4 years. New
machine costs Rs. 20,000 now and its market value will decreases by Rs. 20% per year 4
years. Operating cost is Rs. 1500 in first year and increase by 30% each year. Calculate
equivalent uniform annual cost of both existing and new machines. MARR = 15%.
Formulate the best replacement strategy if we need the machine for four years only.
3. Determine the choice between defender & challenger by AEC approach when useful life is 5
years & MARR is 10% per year.
DEFENDER CHALLENGER
INITIAL COST 2500000 3500000
ANNUAL COST 1000000 750000
SALVAGE VALUE 500000 1200000

4. The Advanced Electrical Insulator Company is considering replacing a broken inspection


machine which has been used to test the mechanical strength of electrical insulators with a
newer and more efficient one.
• Option 1: If repaired, the old machine can be used for another six years. However, the
firm can sell it now to another firm in the industry for Rs.5,000. If the machine is kept, it will
require an immediate Rs.1,200 overhaul to restore it to operable condition. The overhaul
will neither extend the service life originally estimated nor increase the value of the
inspection machine. The operating costs are estimated at Rs.2,000 during the first year, and
these are expected to increase by Rs.1,500 per year thereafter. Future market values are
expected to decline by 25% each year over the previous year’s value.
• Option 2: The new machine costs Rs.10,000 and will have operating costs of Rs.2,200 in
the first year, increasing by 20% per year thereafter. The expected salvage value is Rs.6,000
after one year and will decline 15% each year. The physical life of the new machine would
last eight years.

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