2. What is the EUAC for the challenger over it\'s useful life? The replacement o

Question

2. What is the EUAC for the challenger over it's useful life?

The replacement of a planning machine is being considered by the Reardorn Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $32,000 for installation and will have an estimated economic life of 11 years and a $1,800 MV at that time. It is estimated that annual expenses will average $12,000 per year. The defender has a present BV of $6,500 and a present MV of $4000. Data for the defender for the next three years are given below. Using a before-tax interest rate of 18% per year, make a comparison to determine whether it is economical to make the replacement now Year MV at End of BV at End of Expenses during Year $4,875 3,250 1,625 Click the icon to view the interest and annuity table for discrete compounding when i Year S 1,000 - 1,500 -2,000 the Year $18,000 23,000 28,000 18% per year Fill in the table for the EUAC values for the defender for years 1-3. (Round to the nearest dollar.) Year EUAC

Explanation / Answer

Soln : EUAC stands for Equivalent uniform annual cost, please refer here the table for the calculation:

EUAC is calculated using this for 1st year = 4000*0.18 +(4000-(-1000)) + expenses during year, similarly for others as well, we can see here that in year 2 the EUAC is min. , hence considered as $23320 as the EUAC for defender.

2. EUAC can be calculated for challenger using this:

EUAC = 32000*(A/P, 18%,11) +12000+ 1800*(A/F,18%,11) = 32000*0.215 +12000+1800*0.035 = 18935.44

EUAC for challenger = 18935.44

Hence, replacing the defender from challenger is better option as EUAC is less of challenger.

Year 0 1 2 3 Market Value 4000 -1000 -1500 -2000 expenses during year 18000 23000 28000 EUAC 23720 23320 28275

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