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Replacement and Retention Decision

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1.) For equipment that has a first cost of $10,000 and the estimated operating costs and year-end salvage
values shown below, determine the economic service life at i 10% per year.
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2.) To improve package tracking at a UPS transfer facility, conveyor equipment was upgraded with
RFID sensors at a cost of $345,000. The operating cost is expected to be $148,000 per year for the first 3
years and $210,000 for the next 3 years. The salvage value of the equipment is expected to be $140,000 for
the first 3 years, but due to obsolescence, it wont have a significant value after that. At an interest rate of
10% per year, determine
(a) The economic service life of the equipment and associated annual worth
(b) The percentage increase in the AW of cost if the equipment is retained 2 years longer than the
ESL
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3.) Determine the economic service life and corresponding AW value for a machine that has the
following cash flow estimates. Use an interest rate of 14% per year and hand solution.
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4.) In planning a plant expansion, MedImmune has an economic decision to makeupgrade the
existing controlled-environment rooms or purchase new ones. The presently owned ones were purchased 4
years ago for $250,000. They have a current quick sale value of $20,000, but for an investment of
$100,000 now, they would be adequate for another 4 years, after which they would be sold for $40,000.
Alternatively, new controlled-environment rooms could be purchased at a cost of $270,000. They are
expected to have a 10-year life with a $50,000 salvage value at that time. Determine whether the company
should upgrade or replace. Use a MARR of 20% per year.
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5.) Three years ago, Witt Gas Controls purchased equipment for $80,000 that was expected to have a
useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing $30,000
one year ago. Technology changes now require that the equipment be upgraded again for another $25,000 so
that it can be used for 3 more years. Its annual operating cost will be $47,000, and it will have a $22,000
salvage after 3 years. Alternatively, it can be replaced with new equipment that will cost $68,000 with
operating costs of $35,000 per year and a salvage value of $21,000 after 3 years. If replaced now, the existing
equipment will be sold for $9000. Calculate the annual worth of the defender at an interest rate of 10% per
year.
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6.) A pulp and paper company is evaluating whether it should retain the current bleaching process that
uses chlorine dioxide or replace it with a proprietary oxypure process. The relevant information for each
process is shown. Use an interest rate of 15% per year to perform the replacement study.
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7.) Nano Technologies intends to use the newest and finest equipment in its labs. Accordingly, a senior
engineer has recommended that a 2-year-old piece of precision measurement equipment be replaced
immediately. This engineer believes it can be shown that the proposed equipment is economically
advantageous at a 10% per year return and a planning horizon of 3 years.
(a) Perform the replacement analysis using the annual worth method for a specified 3-year study
period.
(b) Determine the challengers capital recovery amount for the 3-year study period and the expected
full life. Comment on the effect made by the 3-year study period.
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8.) Two processes can be used for producing a polymer that reduces friction loss in engines. Process K,
which is currently in place, has a market value of $165,000 now, an operating cost of $69,000 per year, and a
salvage value of $50,000 after 1 more year and $40,000 after its maximum 2-year remaining life. Process L,
the challenger, will have a first cost of $230,000, an operating cost of $65,000 per year, and salvage values of
$100,000 after 1 year, $70,000 after 2 years, $45,000 after 3 years, and $26,000 after its maximum expected
4-year life. The companys MARR is 12% per year. You have been asked to determine which process to select
when
(a) a 2-year study period is used and
(b) a 3-year study period is used.
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