Engineering Economic Analysis

Summary

SPREADSHEETSAND REPLACEMENTANALYSIS

Spreadsheets are obviously useful in nearly all after-tax calculations. However, they are

absolutely required for optimal life calculations in after-tax situations. Because MACRS

is the tax law, the after-tax cash flows are different in every year. Thus, the NPV function

and the PMT function are both needed to find the minimum EUAC after taxes. Figure 13-7

illustrates the calculation of the minimum cost life for Example 13-14.

"' "'. A--'~"~ _ .<-~lr-'-"C. -<Jl '. J'i- .;E--- .<:::".'~.:\~.S;JL "

.t. Table 13-2 Table 13-3 6% InterestRate

.2. O&M & Depr. if disposed of

j Year ATCF ATCF NPV EAC

<4 0 -$100,000

. 5 1 -$284. $64,284 -39,623 $42,000 =PMT($D$I,A5,D5)
6 2 1,396 51,488 -53,201 29,018
'7.. 3 -3,804 41,492 -67,382 25,208
i..8.. 4 -8,204 33,496 -82,186 23,718
9 5 -12,028 26,924 -97,587 23,167
.10 6 -14,432 20,356 -113,530 23,088 optimallife.
.11 7 -16,828 13,784 -129,904 23,270
,)2" 8 -21,016 9,000 -146,610 23,610
13 '9 -25,200 6,000 -163,621 24,056
~t1 10 -27,600 3,oo.g..~-180,909 24,580 =PMT($D$I,A 14,D14)
15 ____
16 =NPV($D$I,$B$5:BI4)+$I $4+PV($D$I,AI4,O,-C14)
17 =NPV(i, B column) + year ( + present valueofa futuresalvage

FIGURE 13-7 Spreadsheet for life with minimum after-tax cost.

In Figure 13-7, the NPV finds the present worth of the irregular cash flows from Period 1

through Period tfort=1 to life. The PV function is used to find the PW of the salvage value.

Then PMT can be used to find the EUAC over each potential life. Before-tax replacement

analysis can also be done this way. The spreadsheet block function NPV is used to find the

PW of cash flows from Period 1 to Periodt.Note that the cell for Period 1 is an absolute

address and the cell for periodtis a relative address. This allows the fonnula to be copied.

UMMARY

In selecting equipment for a new plant the question is, which of the machines available

on the market will be more economical? But when a given piece of equipment is now

performing the desired task, the analysis is more complicated. The existing equipment.

(called the defender) is already in place, so the question is, shall we replace it now, or

shall we keep it for one or more years? When a replacement is indicated, it will be by

the best available replacement equipment (called the challenger). When we already have

equipment, there may be a tendency to use past costs in the replacementanalysis. But only

present and future costs are relevant.

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