Problems 435(a)What is the lowest EUAC of thedefender?
(b)What is the economic life of thechallenger?
(c) When, if at all, should we replace thedefender
with thechallenger?
13-24 As proprietor of your own business, you are consid-
ering the option of purchasing a new high-efficiency
machine to replace older machines currently in use.
You believe that the new technology can be used to
replace four of the older machines, each with a cur-
rent market value of $600. The new machine will cost
$5000 and will save the equivalent of 10,000 kW-hr
of electricity per year over the older machines. After
a period of 10 years neither option (new or old) will
have any market value. If you use a before tax MARR
of 25% and pay $0.075 per kilowatt-hour, would you
replace the old machines today with the new one?13-25 Fifteen years ago the Acme Manufacturing Company
bought a propane-powered forklift truck for $4800.
The company depreciated the forklift using straight-
line depreciation, a 12-year life, and zero salvage
value. Over the years, the forklift has been a good
piece of equipment, but lately the maintenance cost
has risen sharply. Estimated end-of-year maintenance
costs for the next 10 years are as follows:
Year
1
2
3
4
5-10Maintenance Cost
$400
600
800
1000
1400/yearThe old forklift has no present or future net salvage
value, as its scrap metal value just equals the cost to
haul it away. A replacement is now being considered
for the old forklift. A modem unit can be purchased
for $6500. It has an economic life equal to its 10-
year depreciable life. Straight-line depreciation will
be employed, with zero salvage value at the end of the10-year depreciable life. At any time the new fork-
lift can be sold for its book value. Maintenance on
the new forklift is estimated to be a constant $50 per
year for the next 10 years, after which maintenance
is expected to increase sharply. Should Acme Manu_-
facturing keep its old forklift truck for the present, or
replace it now with a new one? The firm expects an.
8% after-tax rate of return on its investments. Assume
a 40% combined state-and-federal tax rate.
(Answer:Keep the old forklift truck.)
13-26 A firm is concerned about the condition of some of
its plant machinery. Bill James, a newly hired engi-
neer, was assigned the task of reviewing the situa-
tion and determining what alternatives are available.
After a careful analysis, Bill reports that there are five
feasible, mutually exclusive alternatives.Alternative A: Spend $44,000 now repairing
various items. The $44,000 can be charged as
a current operating expense (rather than cap-
italized) and deducted from other taxable in-
come immediately. These repairs are anticipated
to keep the plant functioning for the next 7
years with operating costs remaining at present
levels.Alternative B: Spend $49,000 to buy general-
purpose equipment. Depreciation would be
straight line, with the depreciable life equal to
the 7-year useful life of the equipment. The
equipment will have no end-of-useful-life sal-
vage value. The new equipment will reduce op-
erating costs $6000 per year below the present
level.
Alternative C: Spend $56,000 to buy new spe-
cialized equipment. This equipment would be
depreciated by sum-of-years' -digits deprecia-
tion over its 7-year useful life. This equipment
would reduce operating costs $12,000 per year
below the present level. It will have no end-of-
useful-life salvage value.
Alternative D: This alternative is the same as
AlternativeB,except that this particular equip-
ment would reduce operating costs $7000 per
year below the present level.
Alternative E: This is the "do-nothing" alterna-
tive. If nothing is done, future annual operating
costs are expected to be $8000 above the present
level.- -.-
Dr.
ii'lw-Marginal EUACIf
Cost Data Kept n Years
Year,n Defender Challenger
1 $3000 $4500
2 3150 4000
3 3400 3300
4 3800 4100(^542504400)
6 4950 6000