Please show how this problem is solved Anthony Rauth, chief engineer for Wegmans

Question

Please show how this problem is solved

Anthony Rauth, chief engineer for Wegmans northeastern district, is considering the replacement of one of the four ovens at a store bakery in Elmira. Its salvage value and maintenance costs for several years are given in the table below. A new oven costs $80,000 and this price includes a complete guarantee of the maintenance costs for the first two years, and it covers a good proportion of the maintenance costs for years 3 and 4. The salvage value and maintenance costs are also summarized in the table. Both the old and the new ovens have similar productivities and energy costs. Should Anthony replace the oven this year, if Wegmans MARR is 10%?

Explanation / Answer

Are we ignoring taxes for this problem? If so, just find the NPV of each and compare (you want the lower one since these are costs). I'm also going to assume we sell both in Y4, since it's the only way to compare with this info.

For keeping:

Y1 Costs: 9,500
Y2 Costs: 9,600
Y3 Costs: 9,700
Y4 Net Costs: 2,800 (7000 from the sale)

(95/1.1+96/1.1^2+97/1.1^3+28/1.1^4)*100 =

For selling:

Y0: +20k from sale, -80k from cost so net 60k

Y1: 0

Y2: 0

Y3: 1000

Y4: 3000, 62,000 from selling so net 59k profit

60000 + 1000/1.1^3 + -59000/1.1^4 =

So from this it says switching is better because the NPV of the costs is lower.

25770.44

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