10. (5 pts) Typically, there are two alternatives in a replacement analysis. One
ID: 1127145 • Letter: 1
Question
10. (5 pts) Typically, there are two alternatives in a replacement analysis. One alternative is to replace the defender now. The other alternative is which of the following? (A) Keep the defender for its remaining useful life. (B) Keep the defender for another year and then reexamine the situation. (C) Keep the defender until an improved challenger better than the current challenger comes to market (D) Keep the defender as long as it's operational. 11, (5 pts) The cash flows for three different alternatives are given in table below. If MARR is set at 8%, determine which is the best alternative? Alt. X Alt. Y Alt. Z 9,000 12,500 7.500 Data Initial Cost, $ Net Benefits/ Year, S 528 ROR Life, Years 1,063 510 9% 25 5% 7% 25 25 (A) Alt. X (B) Alt. Y (C) Alt. Z (D) Alt. Y or Alt. ZExplanation / Answer
10.
Correct Answer:
B.
Defender alternative will be used for one year. Afterwards, the defender will be analyzed for its cost, benefits and compared with the challengers. Then, any decision will be taken.
11.
B.
Alternative Y has higher rate of return of 9% among all the three alternatives, so alternative Y will be selected.
On the basis of NPW also,
NPW of alternative X = 528*(1-1/(1+8%)^25)/.08 - 9000 = -$3363.72
NPW of Alternative Y = 1063*(1-1/(1+8%)^25)/.08 - 12500 = -$1152.71
NPW of alternative Z = 510*(1-1/(1+8%)^25)/.08 - 7500 = -$2055
Alternative Y is giving least NPW cost.
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