A specialty concrete mixer used in construction was purchased for $340,000 7 yea

Question

A specialty concrete mixer used in construction was purchased for $340,000 7 years ago. It is MACRS-GDS 5-year property. Its annual O&M costs are $95,000. At the end of an 8-year planning horizon, the mixer will have a salvage value of $5,250. 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 $75,000.

A. Show the EUAC values used to make your decision using the cash flow approach (insider’s viewpoint approach):
Keep existing concrete mixer: $

Replace with new concrete mixer: $

B. Use the opportunity cost approach (outsider’s viewpoint approach).
Keep existing concrete mixer: $

Explanation / Answer

Solution:

(a) KEEP EXISTING SPECIALTY CONCRETE MIXER

EUAC = 95000 - 5250(A|F 9%,8)

EUAC = 95000 - 5250 (0.09067)

EUAC = $94,523.96

REPLACE WITH NEW SPECIALTY CONCRETE MIXER

EUAC = (375,000 - 75,000) (A/P, 9%, 8) + 40,000 - 45,000 (A|F, 9%, 8)

EUAC = 300,000 (0.18067) + 40,000 - 45,000 (0.09067)

EUAC = $90,121.97

Recommedation: Replace with new specialty concrete mix (EUAC is smallest)

(b) KEEP EXISTING SPECIALTY CONCRETE MIXER

EUAC = 75000 (A|P 9%, 8) + 95,000 - 5250(A|F 9%,8)

EUAC = 75000 (0.18067) + 95,000 - 5250 (0.09067)

EUAC = $108,074.5

REPLACE WITH NEW SPECIALTY CONCRETE MIXER

EUAC =375,000 (A/P, 9%, 8) + 40,000 - 45,000 (A|F, 9%, 8)

EUAC = 375,000 (0.18067) + 40,000 - 45,000 (0.09067)

EUAC = $103,672.5

Recommedation: Replace with new specialty concrete mix (EUAC is smallest)

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