Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 10

In Example 11.3, the market value (salvage value) series of the proposed $38 million replacement kiln (GH) dropped to $25 million in only 1 year and then retained 75% of the previous year's market value through the remainder of its 12-year expected life. Based on the experience with the current kiln, and the higher-temperature capability of the replacement, the new kiln is actually expected to retain only 50% of the previous year's value starting in year 5. Additionally, the heating element replacement in year 6 will probably cost $4 million, not $2 million. And finally, the maintenance costs will be considerably higher as the kiln ages. Starting in year 5, the AOC is expected to increase by 25% per year, not 10% as predicted earlier. The Manager of Critical Equipment is now very concerned that the ESL will be significantly decreased from the 12 years calculated earlier (Example 11.3).
a) Determine the new ESL and associated AW value.
b) In percentage changes, estimate how much these new cost estimates may affect the minimum-cost life and AW of cost estimate.