A specialty concrete mixer used in construction was purchased for $315,000 7 yea

Question

A specialty concrete mixer used in construction was purchased for $315,000 7 years ago. It is MACRS-GDS 5-year property. Its annual O&M costs are $105,000. At the end of an 8-year planning horizon, the mixer will have a salvage value of $6,000. If the mixer is replaced, a new mixer will require an initial investment of $375,000, and at the end of the 8-year planning horizon, the new mixer will have a salvage value of $45,000. Its annual O&M cost will be only $40,000 due to newer technology. Use an EUAC measure, a tax rate of 40 percent, and an after-tax MARR of 9 percent to perform an after-tax analysis to see if the concrete mixer should be replaced if the old mixer is sold for its market value of $59,000.

Use the cash flow approach (insider’s viewpoint approach).

Replace concrete mixer?

Show the EUAC values used to make your decision:

Explanation / Answer

KEEP EXISTING SPECIALTY CONCRETE

MIXER

REPLACE WITH NEW SPECIALTY

CONCRETE MIXER

105000-6000(A|F9%,8)

375000-59,000)(A|P 9%,8)+40000-45000(A|F 9%,8)

$104,455.80 >$93,019.70

RECOMMENDATION: Replace the EXISTING CONCRETE MIXER (Its EUAC is the

smallest)

KEEP EXISTING SPECIALTY CONCRETE

MIXER

REPLACE WITH NEW SPECIALTY

CONCRETE MIXER

MARKET VALUE $59,000 FIRST COST $375,000 ANNUAL O&M COST $105,000 ANNUAL O&M COST $40,000 SALVAGE VALUE IN 8 YEARS $6,000 SALVAGE VALUE IN 8 YEARS $45,000 REMAINING LIFE 8 REMAINING LIFE 8 MARR 9% MARR 9% EUAC

105000-6000(A|F9%,8)

EUAC

375000-59,000)(A|P 9%,8)+40000-45000(A|F 9%,8)

EUAC 105000-(6000 * 0.0907) = $104,455.80 EUAC 316,000(0.1807) + 40,000 - 45,000(0.0907) = $93,019.70

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