Question

4. (17) An option to replace an existing operating machine has been received. The replacement would cost 45,000 to purchase and install. Based on used machine prices the salvage values are estimated to be 26,000 after 1 year, 14,000 after 2 and 2000 after 3. Operating costs are estimated to be 18,000 in year 1, 21,000 in year 2, and 29,000 in year 3. The current machine has estimated operating costs of 32.000 in year 1 and 41,000 in year 2. The machine's value now is 9000, 3000 one year from now, and 300 two years from now. Use an MARR of 8.0% for analysis. a. What is the full economic cost of keeping the existing machine 1 year? b. What is the ESL of the replacement machine and the uniform equivalent cost at the ESL? c. What is the recommended decision now of keeping or replacing the existing machine?

Answer 1

Solu:-

Given Total replacement cost (p) = 45000

a) Economic cost of keeping the existing machine:

operating cost = 32000

less: Salvage Value = (3000)

Net Economic Cost = 29000

b) Calculating ESL:-

Year	Purchase cost (A)	Salvage Value (B)	Net Cost(-A + B)
1	45000	26000	-19000
2	45000	14000	-31000
3	45000	2000	-43000

Year	Net Cost (A)	Df @ 8% (B)	A*B ( C)	AOC (D)	AW(C-D)
1	-19000	0.9259	-17592	18000	408
2	-31000	0.8573	-26576	21000	-5576
3	-43000	0.7938	-34133	29000	-5133

Since Annual Worth (AW) is maximum in year 1,

Hence ESL = 1year

c) Recommendation: since the ESL is only 1 year for new machine where old machine can serve for 2 more years, hence replacement is not recommended