2) (30 points) A manufacturing company just bought a special purpose testing equ

Question

2) (30 points) A manufacturing company just bought a special purpose testing equipment for $500,000. First year's O&M; expenses are expected to be $50,000. The O&M; expenses are expected to increase by S10,000 per year from the second year onwards. Because of rapid advances in testing technology, the equipment is expected to have negligible salvage value at the end of its useful life of 5 years. However, it will cost the company $50,000 to dispose the equipment in an environmentally friendly manner. MARR is 10% per year compounded annually a) (15 points) Determine the capital recovery cost for the testing equipment. b) (15 points) Determine the EUAC for the testing equipment.

Explanation / Answer

Initial Investment = $500,000

O&M Cost in 1st year = $50,000 which increases by $10,000 every year

Salvage value = Nil

Disposal cost at the end of 5th year = $50,000.

MARR = 10%

a. What is the capital recovery cost?

CR = Initial cost (A/P, 10%, 5) – Salvage value (A/F, 10%, 5)

Since there is no salvage value, capital recovery cost will be = Initial cost (A/P, 10%, 5)

CR = $500,000 (0.2638) = 131,900

b. Determine EUAC

First convert the gradient series cash outflow into uniform cash outflow

A = A1 + G (A/G, 10%, 5)

A = 50,000 + 10,000 (1.8101) = 68,101

NPW of the investment = 500,000 + 68,101 (P/A, 10%, 5) + 50,000 (P/F, 10%, 5)

NPW = 500,000 + 68,101 (3.7908) + 50,000 (0.6209) = 789,202

EUAC = NPW (A/P, 10%, 5)

EUAC = 789,202 (0.2638) = 208,192

OR

Capital recovery cost = 131,900

Annual O&M Cost = 68,101

Annual Disposal cost = 50,000 (A/F, 10%, 5)

Annual Disposal cost = 50,000 (0.1638) = 8,190

EUAC = 131,900 + 68,101 + 8,190 = 208,191

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