A company has an overhead crane that has an estimated remaining life of 8 years. The...
A company has an overhead crane that has an estimated remaining life of 8 years. The crane can be sold now for $6000. If the crane is kept in service, it must be overhauled immediately at a cost of $3000. Operating and maintenance costs will be $2800 per year after the crane is overhauled. The overhauled crane will have a $500 MV at the end of the 8-year study period. A new crane will cost $22000, will last for 8 years, and will have a $2000 MV at that time. Operating and maintenance costs are $1000 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives.
a)What is the AW of the defender?
b)What is the AW of the challenger?
c)Should the company replace the old crane?
Homework Answers
a) AW of the defender = -11000*(A/P,10%,8)-2800
= -11000*0.187444-2800
= -4861.88
b) AW of the challenger = -22000*(A/P,10%,8)-1000+2000*(A/F,10%,8)
= -22000*0.187444-1000+2000*0.087444
= -4948.88
c) The company should not replace the old crane
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