- ... ... ... - - .. - ...-........-..
Problems 433another used car. He must pay the loan back in two
equal installments of $2500 due at the end of Year
1 and Year 2, and at the end of the second year he
must give the colleague the car. The "new" used car
has an expected annual maintenance cost of $300. If
the professor selects this alternative, he can sell his
current vehicle to a junkyard for $1500. Interest is
5%. Using present worth analysis, which alternative
should he select and why?
~ 13-15 The Ajax Corporation purchased a railroad tank car
8 years ago for $60,000. It is being depreciated by
SOYD depreciation, assuming a 10-year depreciable
life and a $7000 salvage value. The tank car needs
to be reconditioned now at a cost of $35,000. If this
is done, it is estimated the equipment will last for 1°
more years and have a $10,000 salvage value at the
end of the 1° years.
On the other hand, the existing tank car could be
sold now for $10,000 and a new tank car purchased
for $85,000. The new tank car would be depreciated
by MACRS depreciation. Its estimated actual salvage
value would be $15,000. In addition, the new tank
car would save $7000 per year in maintenance costs,
compared to the reconditioned tank car.
Based on a 15% before-tax rate of return, deter-
mine whether the existing tank car should be recon-
ditioned or a new one purchased.(Note:The problem
statement provides more data than are needed, which
is typical of real situations.) (Answer:Recondition
the old tank car.)
13-16 The Quick Manufacturing Company, a large prof-
itable corporation, is considering the replacement of
a production machine tool. A new machine would
cost $3700, have a 4-year useful and depreciable life,
and have no salvage value. For tax. purposes, sum-
of-years'-digits depreciation would be used. The ex-
isting machine tool was purchased 4 years ago at a
cost of $4000 and has been depreciated by straight-
line depreciation assuming an 8-year life and no sal-
vage value. The tool could be sold now to a used
equipment dealer for $1000 or be kept in service
for another 4 years. It would then have no salvage
value. The new machine tool would save about $900
per year in operating costs compared to the existing
machine. Assume a 40% combined state and federal
tax rate.
(a)Compute the before-tax rate of return on the re-
placement proposal of installing the new machine
rather than keeping the existing machine..
i
t
(b)Compute the after-tax rate of return on this re-
placement proposal. (Answer: (a) 12.6%)
13-17 The Plant Department of the local telephone com-
pany purchased four special pole hole diggers 8 years
ago for $14,000 each. They have been in constant
use to the present. Owing to an increased workload,
additional machines will soon be required. Recently
it was announced that an improved model of the
digger has been put on the market. The new ma-
chines have a higher production rate and lower main-
tenance expense than the old machines, but will cost
$32,000 each. The service life of the new machines
is estimated to be 8 years, with salvage value esti-
mated at $750 each. The four original diggers have
an immediate salvage of $2000 each and an esti-
mated salvage value of $500 each 8 years hence.
The estimated average annual maintenance expe~e
associated with the old machines is approximately
$1500 each, compared with $600 each for the new
machines.
A field study and trial indicate that the work-
load would require three additional new machines if
the old machines are continued in service. However,
if the old machines are all retired from service, the
present workload plus the estimated increased load
could be carried by six new machines with an annual
savings of $12,000 in operation costs. A personnel
training program to prepare employees to run the ma-
chines will be necessary at an estimated cost of $700
per new machine. If the MARR is 9% before taxes,
what should the company do?
13-18 Five years ago, Thomas Martin purchased and imple-. mented productionmachinerythat had a first cost of
$25,000. At the time of the initial purchase it was esti-
mated that yearly costs would be $1250, increasing by
$500 in each year that followed. It was also estimated
that the market value of this machinery would be only
90% of the previous year's value. It is currently pro-
jected that this machine will be useful in operations
for 5 more years. There is a new machine available
now that has a first cost of $27,900 and no yearly
costs over its 5 year-minimum cost life. If Thomas
Martin uses an 8% before-tax MARR, when, if at all,
should he replace the existing machinery with the n~w
unit?
13-19 Consider Problem 13-18 involving Thomas Martin.
Suggest when, if at all, the old should be replaced
with the new, if the values for the old machine are as
follows. The old machine retains only 70% of its value
-- -------