Session 9 ch11 class (1).ppt

# 31000 11000 2000 40000 principles of engineering

• 60

This preview shows pages 22–33. Sign up to view the full content.

-\$31,000 - \$11,000 + \$2,000 = -\$40,000

This preview has intentionally blurred sections. Sign up to view the full version.

Principles of Engineering Economic Analysis , 5th edition Example 11.3 In the previous example, what should be done if a 10-yr planning horizon is used, a replacement press will cost \$31,000 in 5 yrs and have a salvage value of \$15,000 after 5 yrs use, and O&M costs for the new press will be a \$1,000 gradient series? -\$4,000 + \$15,000 = \$11,000
Principles of Engineering Economic Analysis , 5th edition Example 11.3 In the previous example, what should be done if a 10-yr planning horizon is used, a replacement press will cost \$31,000 in 5 yrs and have a salvage value of \$15,000 after 5 yrs use, and O&M costs for the new press will be a \$1,000 gradient series with a salvage value of \$3000? -\$9,000 + \$3,000 = -\$6,000

This preview has intentionally blurred sections. Sign up to view the full version.

Principles of Engineering Economic Analysis , 5th edition Solution to Example 11.3 EUAC 1 (15%) = [\$7,000( P|A 15%,5) + \$1,000( P|G 15%,5) + \$29,000( P|F 15%,5) + \$1,000( P|G 15%,5)( P|F 15%,5) - \$15,000( P|F 15%,10)]( A|P 15%,10) = [\$7,000(3.35216) + \$1,000(5.77514) +\$29,000(0.49718) + \$1,000(5.77514)(0.49718) - \$15,000(0.24718)](0.19925) = \$8,532.30/yr EUAC 2 (15%) = \$27,000( A|P 15%,10) + \$1,000( A|G 15%,10) - \$3,000( A|F 15%,10) = \$27,000(0.19925) + \$1,000(3.38320) - \$3,000(0.04925) = \$8,615.20/yr The technology forecast for filter presses reversed the recommendation. Keep the Filter Press! EUAC 2-1 (15%) = -\$82.90
Principles of Engineering Economic Analysis , 5th edition Opportunity Cost Approach Before-Tax Analysis

This preview has intentionally blurred sections. Sign up to view the full version.

Principles of Engineering Economic Analysis , 5th edition Opportunity Cost Approach The opportunity cost approach views the transaction from the perspective of an “ outsider ” who does not own the existing asset. The outsider considers the salvage value of the existing asset to be its investment cost if it is retained in service.
Principles of Engineering Economic Analysis , 5th edition Opportunity Cost Approach Opportunity Cost Approach Treat the proceeds from sale of the old machine as the investment required to keep the old machine. This approach is more commonly practiced in replacement analysis.

This preview has intentionally blurred sections. Sign up to view the full version.

Principles of Engineering Economic Analysis , 5th edition Example Defender Market price: \$10,000 Remaining useful life: 3 years Salvage value: \$2,500 O&M cost: \$8,000 Challenger Cost: \$15,000 Useful life: 3 years Salvage value: \$5,500 O&M cost: \$6,000
Principles of Engineering Economic Analysis , 5th edition Comparison of Defender and Challenger Based on Opportunity Cost Approach

This preview has intentionally blurred sections. Sign up to view the full version.

Principles of Engineering Economic Analysis , 5th edition Defender: PW(12%) D = -\$10,000 - \$8,000( P / A , 12%, 3) + \$2,500( P / F , 12%, 3) = -\$27,434.90 AEC(12%) D = -PW(12%) D ( A / P , 12%, 3) = \$11,422.64 Challenger : PW(12%) C = -\$15,000 - \$6,000( P / A , 12%, 3) + \$5,500( P / F , 12%, 3) = -\$25,495.90 AEC(12%) C = -PW(12%) C ( A / P , 12%, 3) = \$10,615.33 Replace the defender now! Annual Equivalent Cost - Opportunity Cost Approach
Principles of Engineering Economic Analysis , 5th edition Example 11.9 A surface mount placement machine was acquired 10 years ago for \$300,000. It can be kept for a maximum of 5 more years, at which time it will have a negligible salvage value. Annual O&M costs for the defender have been increasing by \$5,000 a year since its acquisition. Next year, the O&M costs will total \$120,000. A new SMP machine ( challenger ) is being considered as a replacement for the defender , which has a current market value of \$50,000. The challenger will cost \$500,000 and have annual O&M costs of \$10,000 the first year, increasing by \$5,000 a year.

This preview has intentionally blurred sections. Sign up to view the full version.

This is the end of the preview. Sign up to access the rest of the document.
• Fall '17
• Mike Heny
• Economics, Generally Accepted Accounting Principles, Replacements

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern