Engineering Economic Analysis

-- --- ...-
T
II
~
t

f PROBLEMS

F '

Problems^431

.,

i

li-

f

13-2

It

13-1 Typically there are two alternatives in a replace-

ment analysis. One alternative is to replace the de-

fender now. The other alternative is which one of the

following?

(a) Keep the defender for its remaining useful life.

(b)Keep the defender for another year and then

reexamine the situation.

(c) Keep the defender until there is an improved chal-

lenger that is better than the present challenger.

(d) The answer to this question depends on the data

available for the defender and challenger as well

as the assumptions made regarding the period of

needed service and future challengers.

The economic life of the defender can be obtained

if certain estimates about the defender can be made.

Assuming those estimates prove to be exactly correct,

one can accurately predict the year when the defender

should be replaced, even if nothing is known about the

challenger. Is this assumption true or false? Explain.

A proposal has been made to replace a large heat ex-

changer (3 years ago, the initial cost was $85,000)

with a new, more efficient unit at a cost of $120,000.

The existing heat exchanger is being depreciated

by the MACRS method. Its present book value is

$20,400, but it has no current value, since its scrap

value just equals the cost to remove it from the plant.

In preparing the before-tax economic analysis to

see whether the existing heat exchanger should be

replaced, the proper treatment of the $20,400 book

value becomes an issue. Three possibilities are that

the $20,400 book value of the old heat exchanger is:

(a) Added to the cost of the new exchanger in the

economic analysis.

(b) Subtractedfrom the cost of the new exchanger in

the economic analysis.

(c) Ignoredin this before-tax economic analysis.

Which of the three possibilities is correct?

A machine tool, which has been used in a plant for

10 years, is being considered for replacement. It cost

$9500 and was depreciated by MACRS depreciation

using a 5-year recovery period. An equipment dealer

indicates that the machine has no resale value. Main-

tenance on the machin~ tool has been a problem, with

an $800 cost this year. Future annual mamtenance

costs are expected to be higher. What is the economic

life of this machine tool if it is kept in service?

13-3

13-4

13-5 A new $40,000bottlingmachinehas just been in-

stalled in a plant. It will have no salvage value when

it is removed. The plant manager has asked you to

estimate the economic service life for the machine,

ignoring income taxes. He estimates that the annuai

maintenance cost will be constant at $2500 per year.

What service life will result in the lowest equivalent

uniform annual cost?

13-6 Which one of the following is the proper dollar

value of defender equipment to use in replacement

analysis?

(a) Original cost.

(b) Present market value.

(c) Present trade-in value.

(d) Present book value.

(e) Present replacement cost, if different from origi-

nal cost.

13-7 You have the following options for a major equipment

unit:

(a)Buy new.

(b)Trade in and buy a similar, rebuilt equipment from

the manufacturer.

(c) Have the manufacturer rebuild your equipment

with all new available options.

(d) Have the manufacturer rebuild your equipment to

the original specifications.

(e) Buy used equipment.

State advantages and disadvantages of each option

with respect to after-tax benefits.

13-8 Considerfollowingdata for a defenderasset.What

is the appropriate replacement analysis technique to

• compare this asset against a:competing challenger?
  How is this method used? That is, what comparison
  is made, and how do we choose?
  BTCF in Yearn
  Year,n (marginal costs)
  1 -$2000
  2 -1750
  3 -1500
  4 -1250
  5 -1000
  6 -1000
  7 -1000
  8 -1500
  9 -2000
  10 -3000

..

~I

..~. I...

------ - - - --