Question

A replacement analysis is being done for a vacuum seal on a spacecraft. The current seal can be used for 10 more years, or a new one can be purchased and used instead. The new seal would cost $25,000, and there would be an annual $5,000 of maintenance cost. It is estimated the seal could be sold for $7,000 in 10 years. The current seal can be sold now for $9,000 or for $2,000 in 10 years. The required annual maintenance cost is $7,500 Using 10 years for both alternatives and 12% cost of capital, calculate the present worth of both the defender and the challenger and determine whether the seal should be replaced.

Answer 1

NEW SEAL

	Year	Cash Flow	PV Factor	PV
		A	1 / (1+12%)^Year	A X PV Factor
New Seal Cost	0	$    25,000	1.00	$              25,000
Current seal sale	0	$    (9,000)	1.00	$              (9,000)
Annual maintenance	1	$      5,000	0.89	$                4,464
Annual maintenance	2	$      5,000	0.80	$                3,986
Annual maintenance	3	$      5,000	0.71	$                3,559
Annual maintenance	4	$      5,000	0.64	$                3,178
Annual maintenance	5	$      5,000	0.57	$                2,837
Annual maintenance	6	$      5,000	0.51	$                2,533
Annual maintenance	7	$      5,000	0.45	$                2,262
Annual maintenance	8	$      5,000	0.40	$                2,019
Annual maintenance	9	$      5,000	0.36	$                1,803
Annual maintenance	10	$      5,000	0.32	$                1,610
New seal sale	10	$    (7,000)	0.32	$              (2,254)
				$              41,997

CURRENT SEAL

	Year	Cash Flow	PV Factor	PV
		A	1 / (1+12%)^Year	A X PV Factor
Annual maintenance	1	$      7,500	0.89	$                6,696
Annual maintenance	2	$      7,500	0.80	$                5,979
Annual maintenance	3	$      7,500	0.71	$                5,338
Annual maintenance	4	$      7,500	0.64	$                4,766
Annual maintenance	5	$      7,500	0.57	$                4,256
Annual maintenance	6	$      7,500	0.51	$                3,800
Annual maintenance	7	$      7,500	0.45	$                3,393
Annual maintenance	8	$      7,500	0.40	$                3,029
Annual maintenance	9	$      7,500	0.36	$                2,705
Annual maintenance	10	$      7,500	0.32	$                2,415
Current seal sale	10	$    (2,000)	0.32	$                 (644)
				$              41,733

Current seal is better. Replacement is NOT required