Park F Ch 11 FEE Problem

Park F Ch 11 FEE Problem - Replacement Basics without...

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Replacement Basics without Considering Income-Tax Effects 11.1 Inland Trucking Company is considering the replacement of a 1,000 lb capacity forklift truck. The truck was purchased three years ago at a cost of $15,000. The diesel-operated forklift truck was originally expected to have a useful life of eight years and a zero estimated salvage value at the end of that period. However, the truck has not been dependable and is frequently out of service while awaiting repairs. The maintenance expenses of the truck have been rising steadily and currently amount to about $3,000 per year. The truck could be sold now for $6,000. If retained, the truck will require an immediate $1,500 overhaul to keep it in operable condition. This overhaul will neither extend the originally estimated service life nor increase the value of the truck. The updated annual operating costs, engine overhaul cost, and market values over the next five years are estimated as follows: N O&M Depreciation Engine Market Overhaul Value -3 -2 $3,000 -1 $4,800 0 $2,880 $1,500 $6,000 1 $3,000 $1,728 $4,000 2 $3,500 $1,728 $3,000 3 $3,800 $864 $1,500 4 $4,500 $0 $1,000 5 $4,800 $0 $5,000 $0 A drastic increase in O&M costs during the fifth year is expected as a result of another overhaul, which will be required in order to keep the truck in operating condition. The firm’s MARR is 15%. (a) If the truck is to be sold now, what will be its sunk cost? (b) What is the opportunity cost of not replacing the truck now? (c) What is the equivalent annual cost of owning and operating the truck for two more years? (d) What is the equivalent annual cost of owning and operating the truck for five more years? Answer (a) Purchase cost = $15,000, market value = $6,000, Sunk cost = $15,000 - $6,000 = $9,000 (b) opportunity cost = $6,000 1
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(c) PW (15%) = -$6,000 - $1,500 - $3,000(P/F, 15%, 1) - ($3,500 - $3,000) (P/F, 15%, 2) = -$10,486.77 AE (15%) = -$10,486.77(A/P, 15%, 2) = -$6,450.58 (d) PW (15%) = -$7,500 - $3,000(P/F, 15%, 1) – $3,500 (P/F, 15%, 2) - $3,800(P/F, 15%, 3) – $4,500 (P/F, 15%, 4) - $9,800(P/F, 15%, 5) = - $22,698.98 AE (15%) = - $22,698.98 (A/P, 15%, 5) = -$6,771.46 2
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11.2 Komatsu Cutting Technologies is considering replacing one of its CNC machines with a machine that is newer and more efficient. The firm purchased the CNC machine 10 years ago at a cost of $135,000. It had an expected economic life of 12 years at the time of purchase and an expected salvage value of $12,000 at the end of the 12 years. The original salvage estimate is still good, and the machine has a remaining useful life of two years. The firm can sell this old machine now to another firm in the industry for $30,000. The new machine can be purchased for $165,000, including installation costs. It has an estimated useful (economic) life of eight years. The new machine is expected to reduce cash operating expenses by $30,000 per year
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This note was uploaded on 01/31/2012 for the course ECN 801 taught by Professor Bardis during the Spring '11 term at Ryerson.

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Park F Ch 11 FEE Problem - Replacement Basics without...

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