Session 9 ch11 class (1).ppt

# Annual om costs for the defender have been increasing

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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 ) being considered as a replacement for the defender has a current market value of \$50,000. The new SMP machine will cost \$500,000 and have annual O&M costs of \$10,000 the first year, increasing by \$5,000 a year. Based on the remaining useful life of the defender , a 5-year planning horizon is used. After 5 years, the challenger will have a market value of \$200,000. With a BTMARR of 16.67%, should the defender be replaced?

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Principles of Engineering Economic Analysis , 5th edition Solution to Example 11.1 The cash flows for the defender (alternative 1) and challenger (alternative 2) are shown below. Based on the following incremental EUAC ( equivalent uniform annual cash* ) analysis, it is recommended that the defender continue to be used until a more attractive challenger is identified. EUAC 2-1 (16.67%) = \$450,000( A|P 16.67%,5) - \$200,000( A|F 16.67%,5) - \$110,000 = \$890.00 * EUAC > \$0 means AW < \$0 Dear Students please note the correction to what I said during the class. The 200000 market value was actually used in the solution. Please note this correction.
Principles of Engineering Economic Analysis , 5th edition Solution to Example 11.1 The cash flows for the defender (alternative 1) and challenger (alternative 2) are shown below. Based on the following incremental EUAC analysis, it is recommended that the defender continue to be used until a more attractive challenger is identified. EUAC 2-1 (16.67%) = \$450,000( A|P 16.67%,5) - \$200,000( A|F 16.67%,5) - \$110,000 = \$890.00 > \$0* =PMT(16.67%,5,-450000,200000)-110000 = \$889.06 * EUAC > \$0 means AW < \$0 Since EUAC 2-1 (16.67%) > \$0, Do Not Replace! Since EUAC 2-1 (16.67%) > \$0, Do Not Replace!

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Principles of Engineering Economic Analysis , 5th edition A filter press was purchased 3 yrs ago for \$30,000. O&M costs are expected to be \$7,000 next year if the filter press is kept; they will increase by \$1,000 per year, thereafter. In 5 yrs, the filter press has a salvage value of \$2,000. Its book value is \$21,000. A new filter press can be purchased for \$36,000. If purchased, the old filter press can be sold for \$9,000. O&M costs will follow a \$1,000 gradient series, with no cost in the first year. At the end of 5 yrs, the new press will have a \$12,000 salvage value. With a 15% MARR , what should be done? Example 11.2
Principles of Engineering Economic Analysis , 5th edition Solution to Example 11.2 Alternative 1: keep the old press AW(15%) = -\$7,000 - \$1,000(A|G 15%,5) + \$2,000(A|F 15%,5) AW(15%) = -\$7,000 - \$1,000(1.72281) + \$2,000(0.14832) AW(15%) = -\$8,426.17/yr Alternative 2: replace old press AW(15%) = -\$27,000(A|P 15%,5) - \$1,000(A|G 15%,5) + \$12,000(A|F 15%,5) AW(15%) = -\$27,000(0.29832) - \$1,000(1.72281) + \$12,000(0.14832) AW(15%) = -\$7,997.61/yr Replace the filter press! AW 2-1 (15%) = \$428.56

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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?
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?

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• Fall '17
• Mike Heny
• Economics, Generally Accepted Accounting Principles, Replacements

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