Question 4 In the study of Replacement Analysis explain the a. opportunity-cost

Question

Question 4 In the study of Replacement Analysis explain the a. opportunity-cost approach and the 12) 12) b. cash flow approach. Lumberjack Power, operator of a nuclear power plant, is planning to replace its current equipment with some that is more environmentally friendly. The old equipment has annual operating expenses of $6750 and can be kept for 8 more years. The equipment will have a salvage value of $4000, if sold 8 years from now, and has a current market value of s24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of S6250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operation. If the company's MARR is 16% per year, should the equipment be replaced? Use a study period of 8 years and the present worth method.

Explanation / Answer

Solution:

PWD (16%) = -$52,099.30
PWC (16%) = -$83,352.50

The PW of the defender is greater than the PW of the challenger;
the current equipment should be retained for now.

Explanation: Defender:

PWD (16%) = -24,000 - 6750 (P/A, 16%, 8) + 4000 (P/F, 16%, 8)
= -24,000 - 6750 (4.3436) + 4000 (0.3050)
= -52,099.30
  
Challenger: PWC (16%)

= - 62,000 - 6250 (P/A, 16%, 8) + 19,000 (P/A, 16%, 8)
= - 62,000 - 6250 (4.3436) + 19,000 (0.3050)
= - 83,352.50
The PW of the defender is greater than the PW of the challenger;
the current equipment should be retained for now

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.