A specialty concrete mixer used in construction was purchased for $300,000 7 yea

Question

A specialty concrete mixer used in construction was purchased for $300,000 7 years ago. Its annual O&M costs are $105,000. At the end of the 8-year planning horizon, the mixer will have a salvage value of $5,000. If the mixer is replaced, a new mixer will require an initial investment of $375,000. At the end of the 8-year planning horizon, it will have a salvage value of $45,000. Its annual O&M cost will be only $40,000 due to newer technology. Analyze this using an EUAC measure and a MARR of 15% to see if the concrete mixer should be replaced if the old mixer is sold for its market value of $65,000.

a.) Use the cash flow approach (insider

Explanation / Answer

For Existing Mixer

PW of initial cost =300000/P.V Annuity factor (15 years@15%) =300000/5.847=51308.36

PW of Salvage value=5000/F.V Annuity(8 years@15%) =5000/13.727=364.25

Annual O&M cost=105000

EUAC=PW of initial cost -PW of salvage value+ Annual Q&M cost

EUAC=51308.36-364.25+105000=155944.1

For New Mixer

Initial cost=375000-65000=310000

PW of initial cost =310000/P.V Annuity factor (8 years@15%) =310000/4.487=69088.48

PW of Salvage value=45000/F.V Annuity(8 years@15%) =45000/13.727=3278.211

Annual O&M cost=40000

EUAC=PW of initial cost -PW of salvage value+ Annual Q&M cost

EUAC=69088.48-3278.21+40000=105810.3

Thus the mixture should be replaced as the New Mixture has lower EUAC than the existing mixture

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