Ch7 - Chapter 7: Replacement Decisions Two Main Types of...

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Chapter 7: Replacement Decisions Two Main Types of Problems 1. Economic Life How long should a taxi company keep a vehicle? That is, how many years between replacements ? Repair costs increase with age of vehicle: Replace frequently First cost is large: Keep each vehicle a long time (replace infrequently) What is the best frequency of replacement ? 2. Transition Time to an Improved Technology Taxi company has standard gasoline engines now. When should they switch to hybrids? Gasoline is getting more expensive: Switch soon, like now! But new hybrids have large first cost: Use the old cars as long as possible. When is best ?
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An Economic Life Problem Example 7-1: A new bottle capping machine costs $40 000, plus $5000 for installation. The machine is expected to have a useful life of 8 years with no salvage value at that time (assume straight line depreciation). Operating and maintenance costs are expected to be $3000 for the first year, increasing by $1000 each year thereafter. Interest is 12%. What is the economic life of the bottle capper?
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0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 1 2 3 4 5 6 7 8 Number of Years Capper System Kept EAC ($/year) EAC(capital costs) EAC(maintenance costs) EAC(total costs)
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Ch7 - Chapter 7: Replacement Decisions Two Main Types of...

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