Question

20 pts Question 4 The estimated future market values and M&O costs for the following defender and challenger are shown below. We are interested only in what happens over the next three years.If the defender is to be replaced, it must be done now or kept in-place for the 3 years.If i=10%/year and 3-year study period, determine whether or not the challenger is economically advantageous now. Year M&O Cost. S M&O Cost, $ 0. Defender Market Vale. $ 40,000 32,000 23,000 11,000 -45,000 -45,000 -45,000 Challenger Market Value, $ 80,000 65,000 39,000 20,000 19,000 11,000 -37,000 -37,000 -37.000 -38,000 -39,000 5 Replace the defender now Replace the defender after one year Replace the defender after two years Keep the defender for another year

Answer 1

Comparing cost of defender and challenger for 3 years

$AW_{d}=-40,000(\frac{A}{P},10\%,3)-45,000+11,000(\frac{A}{F},10\%,3)\\ AW_{d}=-40,000*0.4021-45,000+11,000*0.3021\\ AW_{d}=-57,760.9$

$AW_{c}=-80,000(\frac{A}{P},10\%,3)-37,000+20,000(\frac{A}{F},10\%,3)\\ AW_{c}=-80,000*0.4021-37,000+20,000*0.3021\\ AW_{c}=-63126$

for 2 years

AW4 = -40,000, 10%, 2) – 45,000 + 23,000C, 10%, 2) AW, = -40000 * 0.5762 - 45000 + 23000 * 0.4762 = -57095.4

$AW_{c}=-80,000(\frac{A}{P},10\%,2)-37,000+39,000(\frac{A}{F},10\%,2)\\ AW_{c}=-80000*0.5762-37000+39000*0.4762=-64524.2$

for 1 year

$AW_{d}=-40,000(\frac{A}{P},10\%,1)-45,000+32,000(\frac{A}{F},10\%,1)\\ AW_{d}=-40000*1.1-45000+32000*1=-57000$

$AW_{c}=-80,000(\frac{A}{P},10\%,1)-37,000+65,000(\frac{A}{F},10\%,1)\\ AW_{c}=-80000*1.1-37000+65000*1=-60000$

annual worth of defender is greater than annual worth of challenger

We should keep the defender