An existing asset that cost $17,000 two years ago has a market value of $12,000
ID: 2793416 • Letter: A
Question
An existing asset that cost $17,000 two years ago has a market value of $12,000 today, an expected salvage value of $2,300 at the end of its remaining useful life of six more years, and annual operating costs of $2,900. A new asset under consideration as a replacement has an initial cost of $10,800, an expected salvage value of $5,500 at the end of its economic life of three years, and annual operating costs of $2,500. It is assumed that this new asset could be replaced by another one identical in every respect after three years at the same initial cost of $10,800, if desired. Use a MARR of 16% to determine if the existing asset should be replaced immediately. Assume the project that uses the asset will last for 6 years from today. Enter the NET PRESENT COST of the preferred alternative."
Explanation / Answer
Old Asset: Analysis of Net present cost
Particular
Time
Present Value Factor @16%
Amount
Present Value
Current market value
0
1
12000
12000
Annual Operating cost
1
0.862
2900
2499.8
2
0.743
2900
2154.7
3
0.641
2900
1858.9
4
0.552
2900
1600.8
5
0.476
2900
1380.4
6
0.41
2900
1189
Salvage
6
0.41
-2300
-943
Net Present Cost
21740.6
New Asset: Analysis of Net present cost
Particular
Time
Present Value Factor @16%
Amount
Present Value
Cost
0
1
10800
10800
Annual Operating Cost
1
0.862
2500
2155
2
0.743
2500
1857.5
3
0.641
2500
1602.5
Salvage
3
0.641
-5500
-3525.5
New asset cost
3
0.641
10800
6922.8
Annual Operating Cost
4
0.552
2500
1380
5
0.476
2500
1190
6
0.41
2500
1025
Salvage
6
0.41
-5500
-2255
Net Present Cost
21152.3
Answer: Net present cost of New asset is lower so existing asset should be replaced immediately.
Particular
Time
Present Value Factor @16%
Amount
Present Value
Current market value
0
1
12000
12000
Annual Operating cost
1
0.862
2900
2499.8
2
0.743
2900
2154.7
3
0.641
2900
1858.9
4
0.552
2900
1600.8
5
0.476
2900
1380.4
6
0.41
2900
1189
Salvage
6
0.41
-2300
-943
Net Present Cost
21740.6
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