A specialty concrete mixer used in construction was purchased for $300,000 7 yea
ID: 2788885 • Letter: A
Question
A specialty concrete mixer used in construction was purchased for $300,000 7 years ago. Its annua... 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. Use the opportunity cost approach (outsider’s viewpoint approach).
Explanation / Answer
Existing concrete mixer
Total annual expenses = $ 105,000
Present market value = $ 65,000
Estimated market value at the end of 8 year planning horizon = $ 5000
New concrete mixer
Capital investment = $ 375,000
Annual expenses = $ 40,000
Estimated market value at the end of 8 year planning horizon = $ 45,000
___________________________________________________________
Equivalent uniform annual cost of old mixer = $ 65,000 ( A/P , 15% , 8 years) + $ 105,000 - $ 5000 ( A/F , 15% , 8 years)
Equivalent uniform annual cost of old mixer = $ 65,000 x 0.222850 + $ 105,000 - $ 5000 x 0.072850
Equivalent uniform annual cost of old mixer = $ 119,121
Equivalent uniform annual cost new concrete mixer = $ 375,000 ( A/P , 15% , 8 years) + $ 40,000 - $ 45,000 ( A/F , 15% , 8 years)
Equivalent uniform annual cost new concrete mixer = $ 375,000 x 0.222850 + $ 40,000 - $ 45,000 x 0.072850
Equivalent uniform annual cost new concrete mixer = $ 120,290.50
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The Equivalent uniform annual cost of new concrete mixer is higher than that of the old concrete mixer. Hence the firm should not buy the new concrete mixer. It should retain the old concrete mixer.
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