r company purchased a piece of equipment four years ago. Because of the high mai
ID: 2266516 • Letter: R
Question
r company purchased a piece of equipment four years ago. Because of the high maintenance costs for this equipment, a new piece of machinery is being considered, per the table below. Calculate EUAC of the old equipment (defender) and new equipment (challenger). Which alternative do you select? (A) You Answer Box: 6 years N study period = MARR = i = Pon-original price of old equipment four years ago = MVon market value of old equipment now = MVo2 market value of old equipment in 6 years- Original estimated life of old equipment- Annual Maintenance costs of old equipment for 12% $12,000 $5,000 $500 10 years $750 the next 6 years Pn = price of new equipment now = MVn2 - market value of new equipment in 6 years- Original Estimated life of new equipment = Annual Maintenance costs of new equipment for $10,000 $2,500 6 years $150 the next 6 years Page 1Explanation / Answer
A piece of equipment is purchased four years ago. But it has high maintanance cost hence it should be replaced with new piece of machinery.
Given MARR( minimum acceptable rate of return) = 12%, study period is 6 years.; N=6
original price of old equipment four yeras ago is $12000 = Pon
market value of old equipment now is $5000 =MVon
market value of old equipment in 6 years is $500 = MVon
EUAC of the old equipment = Pon*(A/P , i%, N)
= 12000*(A/P , i%, N)---------------------(1)
There is a small procedure to find the value of (A/P , i%, N)
Step1 : Take the interest rate and add '1' to that value, we get 1+0.12 = 1.12 =a(say)
Step2: To the result in above step take the power of 'N' = 6 . We get (1.12)10= 3.105=b(say)
Step3: subract '1' from the above result , we get 3.105-1 = 2.105=c(say)
Step4: divide the value b with c i.e b/c = 3.105/2.105=1.475= d(say)
Step5: multiply the result with interest rate , we get 1.475* 0.12 = 0.177
Therefore EUAC = 12000* 0.177 = $2124.66
bu using same procedure, finding the EUAC of new equipment
Step1 : Take the interest rate and add '1' to that value, we get 1+0.12 = 1.12 =a(say)
Step2: To the result in above step take the power of 'N' = 6 . We get (1.12)6= 1.973=b(say)
Step3: subract '1' from the above result , we get 1.973-1 = 0.973=c(say)
Step4: divide the value b with c i.e b/c = 1.973/0.973=2.028= d(say)
Step5: multiply the result with interest rate , we get 2.028* 0.12 = 0.2434
Therefore EUAC = 10000* 0.2434 = $2434.
As per Equivalent uniform annualized cost , we can say that the cost of new equipment is high compared to the old equipment.
Hence I will select the old equipment again to use.
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