Question

Subaru of Indiana Automotive has an overhead crane that has an estimated remaining life of 10 years. The crane can be sold now for $9,000. If the crane is kept in service, it must be overhauled immediately at a cost of $5,500. Operating and maintenance costs will be $3,000 per year after the crane is overhauled. The overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,500 MV at that time. Operating and maintenance costs are $1,100 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives. Should the company replace the old crane? What is the AW of the preferred alternative? (Consider costs as a positive number, because these are cost alternatives positive value, rounded to the nearest dollar, e.g., answer "12" if you believe the answer is a net annual cost of $12.34.) . Therefore, report your answer as a

Answer 1

The Company has 2 alternatives

1 Alternative

Keeping the old crane

Particulars	Amount ( IN $)
Overhauling Cost	5500
Operating and Maintaining Cost Market Value	3300 ( 10 years) 0

For Calculating the Cost at present value = Principal + Operating and maintainence cost - Market Value at the end

= 5500 PVIF (10 %, 0 ) + 3300 PVAF (10%,10)

= 5500 + 20277 $

= $ 25,777

Alternative 2

A new crane to be purchased

Particulars	Amount ( in $)
Principal Amount of Crane	20000
- Old Crane Disposal Amount	9000
Crane Amount	11000
Operating and Maintainence amount Disposal Amount	1100 (8 years) (4500)

Cost of the Project at Present Value = Crane Amount + Operating Expenses - Market Value of Disposal Amount

= 11000 PVIF ( 10%,0) + 1100 PVAF (10 %, 8) - 4500 PVIF (10 %, 8)

=11000 + 5868 - 2099

= 14769

As Cost is lower, Alternative of new crane should be chosen

AW of preferred alternative = $ 14,769