Question

  
QUESTION 4: Exide Technologies think the operation system for their machine tools is too old and too slow, but it can still be used for 5 years with an update. Exide Technologies is

Answer 1

Using Excel for economic service analysis

Economic service analysis of Challenger

Year	Discount factor	O&M cost	PV (O&M)	Cumulative (O&M)	Cumulative (O&M) + Initial Cost	Salvage value	PV (Salvage value)	NPV	(A/P,12%,n)	EUAC
A	B	C	D=C*B	E	F=E+80000	G	H=G*B	I=F-H	J	K = I*J
1	0.89286	10000.00	8928.57	8928.57	88928.57	70500.00	62946.43	25982.14	1.12000	29100.00
2	0.79719	11200.00	8928.57	17857.14	97857.14	69090.00	55078.13	42779.02	0.59170	25312.26
3	0.71178	12544.00	8928.57	26785.71	106785.71	67708.20	48193.36	58592.35	0.41635	24394.87
4	0.63552	14049.28	8928.57	35714.29	115714.29	66354.04	42169.19	73545.10	0.32923	24213.58
5	0.56743	15735.19	8928.57	44642.86	124642.86	65026.96	36898.04	87744.82	0.27741	24341.27
Discount factor	1/(1+0.12)^n
(A/P,i,n)	i((1 + i)^n)/((1 + i)^n-1)

Minimum EUAC is 24213.58 at 4 yrs, so the economic service life is 4 yrs of challenger

Economic service analysis of Defender

Year	Discount factor	O&M cost	PV (O&M)	Cumulative (O&M)	Cumulative (O&M) + Initial Cost	Salvage value	PV (Salvage value)	NPV	(A/P,12%,n)	EUAC
A	B	C	D=C*B	E	F=E+55000	G	H=G*B	I=F-H	J	K = I*J
1	0.89286	9000.00	8035.71	8035.71	63035.71	45000.00	40178.57	22857.14	1.12000	25600.00
2	0.79719	10350.00	8250.96	16286.67	71286.67	42300.00	33721.30	37565.37	0.59170	22227.36
3	0.71178	11902.50	8471.96	24758.64	79758.64	39762.00	28301.81	51456.83	0.41635	21424.00
4	0.63552	13687.88	8698.89	33457.53	88457.53	37376.28	23753.30	64704.23	0.32923	21302.86
5	0.56743	15741.06	8931.90	42389.43	97389.43	35133.70	19935.81	77453.62	0.27741	21486.39
Discount factor	1/(1+0.12)^n
(A/P,i,n)	i((1 + i)^n)/((1 + i)^n-1)

Minimum EUAC is 21302.86 at 4 yrs, so the economic service life is 4 yrs of defender

b.

As EUAC @ 5 yrs of Defender is 21486 which is less than minimum EUAC of challenger, the defender should be kept for 5 yrs before being replaced by challenger

Showing Formula in Excel for Challenger, defender can be calculated in similar way

Year	Discount factor	O&M cost	PV (O&M)	Cumulative (O&M)	Cumulative (O&M) + Initial Cost	Salvage value	PV (Salvage value)	NPV	(A/P,12%,n)	EUAC
A	B	C	D=C*B	E	F=E+80000	G	H=G*B	I=F-H	J	K = I*J
1	=1/(1.12)^A14	10000	=C14*B14	=D14	=80000+E14	70500	=G14*B14	=F14-H14	=0.12*((1 + 0.12)^A14)/((1 + 0.12)^A14-1)	=I14*J14
2	=1/(1.12)^A15	=C14*1.12	=C15*B15	=E14+D15	=80000+E15	=G14*0.98	=G15*B15	=F15-H15	=0.12*((1 + 0.12)^A15)/((1 + 0.12)^A15-1)	=I15*J15
3	=1/(1.12)^A16	=C15*1.12	=C16*B16	=E15+D16	=80000+E16	=G15*0.98	=G16*B16	=F16-H16	=0.12*((1 + 0.12)^A16)/((1 + 0.12)^A16-1)	=I16*J16
4	=1/(1.12)^A17	=C16*1.12	=C17*B17	=E16+D17	=80000+E17	=G16*0.98	=G17*B17	=F17-H17	=0.12*((1 + 0.12)^A17)/((1 + 0.12)^A17-1)	=I17*J17
5	=1/(1.12)^A18	=C17*1.12	=C18*B18	=E17+D18	=80000+E18	=G17*0.98	=G18*B18	=F18-H18	=0.12*((1 + 0.12)^A18)/((1 + 0.12)^A18-1)	=I18*J18
Discount factor	1/(1+0.12)^n
(A/P,i,n)	i((1 + i)^n)/((1 + i)^n-1)