Exam 9: Replacement Analysis

Lumberjack Power, operator of a nuclear power plant, is planning to replace its current equipment with some that is more environmentally friendly. The old equipment has annual operating expenses of $6750 and can be kept for 8 more years. The equipment will have a salvage value of $4000, if sold 8 years from now, and has a current market value of $24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of $6250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operation. If the company's MARR is 16% per year, should the equipment be replaced? Use a study period of 8 years and the present worth method.

Yellowjacket, Inc., a large textile company, is trying to decide how long it should retain one of its machines used in the sludge dewatering processes. The machine currently is estimated to have a $35,000 market value and a future market value of $18,000 next year, decreasing $1700 per year over its remaining maximum useful life of 8 years. The operating cost is expected to be $5500 next year, increasing by $450 each year thereafter. If the company's MARR is 15% per year, what is the economic service life of this asset?

A bin activator has an initial cost of $34,000 and a salvage value described by S = 34,000 - 3300k, where k is the number of years since the bin activator was purchased. The net annual revenue is estimated by R = 5000 + 600k. The equipment will have a maximum useful life of 5 years. If the company's MARR is 4% per year, when is the best time to abandon the equipment?

Bruin Manufacturing is evaluating whether it should retain its current environmental test chamber and room or sell it immediately and purchase a new one. The relevant costs are shown below. The current one can be kept for another 5 years, given that an additional maintenance cost of $500 each year is provided each year. Determine whether the current equipment should be replaced. Use a before- tax MARR of 13% per year and the annual cost method.

A challenger asset with a maximum useful life of 6 years has a first cost of $43,000 and an estimated annual operating cost of $6250. The market value is expected to decrease by $6450 each year for the next 6 years. If the MARR is 10% per year, what is the economic service life of this asset?

Three years ago, a company purchased a system of modular office furniture at a cost of $29,000. Straight- line depreciation with no salvage value and a 5- year recovery period was used to write off the capital investment. A market value of $12,600 is expected if the system is sold now. If the system is kept, the company expects annual maintenance costs of $5500 each year and zero market value at the end of useful life. If the company decides to buy a new system, the new system will cost $32,000 and have a zero market value at the end of the estimated life of 5 years. The company expects annual maintenance costs of $8500 each year. Assume an effective tax rate of 39% and an after- tax MARR of 7% per year. Determine whether the replacement now is economical.

Razorback Corp. is evaluating whether it should keep its automatic guided vehicle or sell it immediately and purchase a new one. The current vehicle can be sold for $28,000 now; however, with an overhaul of $8250, the current vehicle can last another 5 years. Other relevant costs are shown below. Use a before- tax MARR of 5% per year and determine whether the current vehicle should be replaced.

Aztec, a manufacturer of hard board and fiber cement sidings and panels, purchased equipment for its new product line 9 years ago at a cost of $43,000. The asset has a market value of $17,700, if it were sold now. The current asset is expected to provide adequate services for another 3 years, given that the annual maintenance costs of $7250 is provided. It is estimated that, if the current asset is continued in service, its final market value will be $9600 three years from now. However, due to changing customer needs, a new piece of machinery is being considered for the product line. The company can purchase the new equipment at a cost of $51,000 and a $540 salvage value at the end of 15- year economic life. The new equipment has annual maintenance costs of $5250. The SL method with a 15- years life and zero market value is used to write off both assets. Determine whether replacement now is economical based on an after- tax annual worth analysis with an effective tax rate of 38% and an after- tax MARR of 2% per year.