ABC manufacturing company bought a Heavy general purpose t bween its factory and

Question

ABC manufacturing company bought a Heavy general purpose t bween its factory and its four remote warehouses. The old truck (THE DEEEN s betw can be sold today and Al purchase price of $70.000. The ruck four years ago and used it to transport finishe c ompany could replace the old truck with a new truck THE CHALLENGER) for a puir Before-tax MARR for ABC Company is 10% and its tax rate is 40%. (A) Find the Economical Life of the CHALLENGER based on the information listed below: (24 Points) EOY Market Price Operations and Maintenance Costs I $56,000 44,000 34.000 4 22,000 $5,500 6,800 7.400 9,700

Explanation / Answer

The minimum total EAC is in 3 years. Thus the equipment should be sold after 3 years.

Working Points:

Capital recovery cost 1st year = 70,000(A/P 10,1) - 56,000(A/F 10,1)

= 70,000(1.1) - 56,000(1)

= 77,000-56,000

= 21,000

Capital recovery cost 2nd year = 70,000(A/P 10,2) - 44,000(A/F 10,2)

= 70,000(0.576) - 44,000(0.476)

= 40,320-20,944

= 19,376

Capital recovery cost 3rd year = 70,000(A/P 10,3) - 34,000(A/F 10,3)

= 70,000(0.402) - 34,000(0.302)

= 28,140-10,268

= 17,872

Capital recovery cost 4th year = 70,000(A/P 10,4) - 22,000(A/F 10,4)

= 70,000(0.315) - 22,000(0.215)

= 22,050-4,730

= 17,320

EAC O&M for 1st year = {5,500(P/F,10,1)}(A/P,10,1)

= {5,500(1/1.1)}(1.1)

= (5,500 * 0.909090) * 1.1

= 5,500

EAC O&M for 2nd year = {5,500(P/F,10,1)+6,800(P/F,10,2)}(A/P,10,2)

= {5,500(1/1.1)+6,800(0.476/0.576)}(0.576)

= (5,000+5,576) * 0.576

= 10,576 * 0.576

= 6,092

EAC O&M for 3rd year = {5,500(P/F,10,1)+6,800(P/F,10,2)+7,400(P/F,10,3)}(A/P,8,3)

= {5,500(1/1.1)+6,800(0.476/0.576)+7,400(0.302/0.402)}(0.402)

= (5,000+5,576+5,560) * 0.402

= 16,136 * 0.402

= 6,487

EAC O&M for 4th year = {5,500(P/F,10,1)+6,800(P/F,10,2)+7,400(P/F,10,3)+9,700(P/F,10,4)}(A/P,8,3)

= {5,500(1/1.1)+6,800(0.476/0.576)+7,400(0.302/0.402)+9,700(0.215/0.315)}(0.315)

= (5,000+5,576+5,560+6,596) * 0.315

= 22,732 * 0.315

= 7,160

* Most of the time Only 2 digit after decimal is taken to get roundoff answer.

* Anwering figure is roundoff APPROXX,

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EOY Market Price O&M Costs Capital Recovery Cost EAC O&M Total EAC 1 56,000 5,500 21,000 5,500 26,500 2 44,000 6,800 19,376 6,092 25,468 3 34,000 7,400 17,872 6,487 24,358 4 22,000 9,700 17,320 7,160 24,480

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