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Eng 111 - Week 5 Discussion Sheet

# Eng 111 - Week 5 Discussion Sheet - Discussion Sheet 4 Week...

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Discussion Sheet 4 10/28/2011 Week 6: Capital Budgeting and Decision Making TA: Ravichandran Ramakrishnan Replacement Analysis: This was not covered in class but is testable material. Replacement Analysis is used to determine when a machine should be replaced by a new machine. To solve this problem we need to figure out the equivalent annual cost of holding onto a machine versus the annual equivalent annual cost for the replacement. Example: (adapted from Example 6.11) The Company pays no taxes. It can replace its current machine for \$9000 and requires a maintenance cost \$1000 each year for 8 years. At the end of the 8 years the new machine will be disposed for \$2000. Below is the maintenance/ salvage value for the old machine. Find the appropriate time to replace the machine. Cost of Capital is 15% First calculate PV of new machine costs = 9000+ 1000*A 8 .15 – 2000/(1.15) 8 = 12833 Then find EAC = PV/ A 8 .15 = 2860. This is true for every year. Second find PV of old machine PV = 4000 + 10000/1.15 – 2500/1.15 = 2696.

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Eng 111 - Week 5 Discussion Sheet - Discussion Sheet 4 Week...

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