You want to either replace or refurbish the elevator system in an office. Option

Question

You want to either replace or refurbish the elevator system in an office. Option 1 - Referbishing: Refurbishing the elevators will cost $55,000 and extend the life of the elevators another 20 years. Salvage value at the end of 20 years will be $11,000. Annual maintenance costs will be $1,000 per year payable at the end of each period. Option 2 - Replacement: Replacing the elevator system will cost $140,000,
with an expected life of 50 years. Maintenance
costs will be $400 per year. Salvage value at the
end of 50 years will be $28,000. Interest is 4%. Which one is a better option for the organization ( Since two options have different lives, choose the best evaluating factor)

Please show all calculations.

Explanation / Answer

Option 1 - Referbishing:

Refurbishing the elevators will cost =$55,000

extend life of the elevators = 20 years

Salvage value at the end = $11,000

Annual maintenance costs = $1,000

Depreciation = 55000-11000/20 = 2200

cash outflow= 55000 + 1000* 13.59 - 11000 * 0.456 = 63574

Equivalent cash outflow = 4678

Option 2 - Replacement:

Replacing the elevator system will cost = $140,000,

Expected life = 50 years

Maintenance costs = $400 per year.

Salvage value = $28,000

Depreciation = 140000-28000/50 = 2240

cash outflow= 140000 + 400* 21.27 + 28000 *.135 = 144728

Equivalent cash outflow = 6804

Option A is better for the organisation

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