Professional Documents
Culture Documents
2012
12.2)
A. Original cost: The printing machine was purchased for $20,000
B. Market value: The old machines market value is estimated at $10,000.
C. Book value: If the machine sold now its book value is $14,693.
D. Trade in allowance:This amount is the same as the market value.
The market value is the most relevant information, but the defenders current
book value is also relevant as this will be the basis to determine the gains or
losses related to disposal of the defender.
12.3)
Option 1: Keep the defender
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Fundamentals of Engineering Economics, 3rd ed. 2012
12.4)
PW of option 1:$3, 000
PW of option 2 :
PW = -7, 000 + 2,500( P / A,12%, 5) - 3, 000 = -10, 00 + 2,500 3.6048 = -$988
PW of option 3 :
PW = -18, 000 + 5000( P / A,12%,5) + 2000( P / F ,12%,5) = $1,158.8
PW 1 > PW 3 > PW 2
Option1 isbetter. Ans.
12.5)
(a) Purchase cost = $22,000, market value = $6,000, sunk cost = $22,000 -
$6,000 = $16,000
(c)
12.6)
(a) Opportunity cost = $30,000
(b) Assume that the old machines operating cost is $35,000 per year. Then the
new machines operating cost is zero per year. The cash flows associated with the
retaining the defender for two more years are
2
Fundamentals of Engineering Economics, 3rd ed. 2012
n 0 1 2
Cash Flows: -$30,000 -$35,000 -$25,000
(b) Cash flows for the challenger: Year 0: -$175,000; Years 1-7: 0; Year 8:
$8,000
(d) Since AEC D > AECC , we should replace the defender now.
12.7)
(a ) Initial cash outlay of new machine = -$150, 000 - $40, 000 = -$190, 000 Ans.
(b) Annual cash flows of defender = -40, 000( A / P,12%,5) = -$11, 096 per year
(c) Annual cash flows of new machine = -190, 000( A / P,12%, 7) + 80, 000 + 50, 000( A / F ,12%, 7)
= $43,326
Yes, new machineis recommended .
12.8)
(a) AW of old machine = -12, 000( A / P,12%,5) + 8, 000( A / F ,12%,5) = -$2068.6
AW of new machine = - ( 80, 000 - 12, 000 ) ( A / P,12%,5) + 30, 000
= $11,136.8
(b) Yes, new machine should be purchased .
12.9)
(a) AW = -8, 000( A / P,10%,3) + 4, 000 (24 - 16) + 1,800( A / F ,10%,3) = $29.326.98 per year
(b) AW = -(40, 000 - 8, 000)( A / P,10%,5) + 4, 000(24 - 14) + 8, 000( A / F ,10%,5) = $32,868.8 per year
(c ) New machine is recommended .
3
Fundamentals of Engineering Economics, 3rd ed. 2012
12.11)
At i = 12% , the economic service life is 1 year.
4
Fundamentals of Engineering Economics, 3rd ed. 2012
12.13)
(a) At i = 12% , the economic service life for the defender is 2 years:
(b)& (c)
5
Fundamentals of Engineering Economics, 3rd ed. 2012
N C = 10 years
12.14)Correction: Two different O&M figures were given for the new machine in the
first printing. The correct figure is $4,200 for the first year, increasing at an annual rate of
$500.
12.15)
6
Fundamentals of Engineering Economics, 3rd ed. 2012
Since AEC D < AECC , we should not replace the defender now. If no
technological advances are expected in the next few years, the defender should be
used for at least 2 more years. However, it is not necessarily best to replace the
defender at the end of its economic year either.
Marginal analysis:
1. Opportunity cost at the end of year two, which is equal to the market
value then, or $3,000
2. Operating cost for the third year: $5,000
3. Salvage value of the defender at the end of year three: $2,000
The cost of using the defender for one more year from the end of its economic
service life is
7
Fundamentals of Engineering Economics, 3rd ed. 2012
12.16)
It is assumed that the required service period is very long.
We should continue to use the old machine. The economic advantage is $5,290.8-
$4,394.4 = $896.4 per year.
n Defender Challenger
0 -$5,000 -$10,000
1 -$3,000 -$2,000
2 -$4,500 -$3,000
3 -$4,000 -$0
AECC (15%) = ( $10, 000 + $2, 000( P / F ,15%,1) + $3, 000( P / F ,15%, 2) ) ( A / P,15%,3)
= $6,135.29
$3, 000 $4,500 $4, 000
AEC D (15%) = ($5, 000 + + + )( A / P,15%,3)
1.15 1.152 1.153
= $5,974.94
Do not replace the defender now.
12.18)
Year: 0 1 2 3 4 5
Defender $0 -$3K -$3K -$3K -$3K -$3K
Challenger -$10K 0 0 0 0 0
C-D -$10K $3K $3K $3K $3K $3K
(c)
8
Fundamentals of Engineering Economics, 3rd ed. 2012
12.19)
(a)
12.20)
Assume that the old system has a current market value of P.
Let AEC D = AECC and solve for P. We find that P = $76,942. If the resale value
of the defender is higher than $76,941.73, the installation of the new system is
justified.
12.21)
9
Fundamentals of Engineering Economics, 3rd ed. 2012
12.22)
For the challenger, we have:
AECC = $50, 000( A / P,10%,12) + $3, 000 - $6, 000 - $3, 000( A / F ,10%,12)
= $4,198
For the defender, we need to find its economic life. Since the annual operating
cost is constant and the salvage value declines as it ages, the annual equivalent
cost is a decreasing function of the holding period. This means that the economic
life is equal to its physical life, as illustrated in the following table.
( N D = 6 years, AECD = $4, 213). With i = 10%
12.23)
AECOption 1 = $15, 000 + $48, 000( A / P,12%,10) + $12, 000 - $5, 000( A / F ,12%,10)
= $35,210.32
AECOption 2 = ($84, 000 - $6, 000)( A / P,12%,10) + $24, 000 - $9, 000( A / F ,12%,10)
= $37, 291.91
10
Fundamentals of Engineering Economics, 3rd ed. 2012
12.24)
12.25)
11
Fundamentals of Engineering Economics, 3rd ed. 2012
Defender
Cash flows for the defender: Year 0: -$13,000 Years 1-5: 0
Challenger
Replace the defender now as the challenger would provide an annual savings equivalent
to $15,448 whereas the defender would cost $2,164 annually.
12.26)
12
Fundamentals of Engineering Economics, 3rd ed. 2012
Defender
Challenger
13
Fundamentals of Engineering Economics, 3rd ed. 2012
14
Fundamentals of Engineering Economics, 3rd ed. 2012
12.27)
At i = 10% and tax rate = 40%, the economic service life is 1 year.
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Fundamentals of Engineering Economics, 3rd ed. 2012
12.28)
The depreciation schedule when the defender was placed in service: D1 = $3,573, D2 =
$6,123, D3 = $4,373, D4 = $3,125, D5 = $2,231, D6 = $2,231, D7 = $2,231, D8 = $1,116.
Note that the cost of retaining the defender on after-tax basis is $8,285, instead of $7,700.
The scheduled depreciation amount during the fourth year of ownership is $3,125. Since
the asset will be disposed of during the recovery period, the allowed depreciation amount
will be (0.5) ($3,125) = $1,561. Then, the book value becomes $9,370, instead of $7,809.
With the market value of $7,700, there will be a loss of $1,670. The tax credit on this loss
will be $1,670(0.35) = $584.50. Finally, the net proceeds from sale of old asset will
be$8,285 (= $7,700 + $584.50).
The defenders remaining useful (economic) life is 2 more years with an AEC value of
$4,374, i.e., N D = 2, AEC D = $4,374 .
Fundamentals of Engineering Economics, 3rd ed. 2012
(b) N C = 10 years
AECC = $4,319
Keep the defender for two years, which happens to be the same as the economic
service life as calculated before. (In general, you should not expect this to happen
all the time.)
Fundamentals of Engineering Economics, 3rd ed. 2012
12.29)
B5 = $576 and B6 = 0.
12.30)
Fundamentals of Engineering Economics, 3rd ed. 2012
gain = S n - Bn
gain tax = tm ( S n - Bn )
net proceeds = (1 - tm ) S n + tm Bn
= (1 - 0.40)(22, 000 - 2000n) + 0.40(30, 000 - 3, 000 n)
I - (1 - tm ) S n - tm Bn
CR =
n
4,800 + 2, 400n
=
n
4,800
= + 2, 400
n
3, 000 ( 1.15 )
n -1
A/T O&M = (1 - tm )
= 1,800 ( 1.15 )
n -1
1,800 ( 1.15 )
n -1
n
AE O & M = n =1
n
( 1.15)
n n -1
= 1,800 n =1
n
1,800 (1.15 - 1) n
(1.15n - 1)
= = 12, 000
n 1.15 - 1 n
n
(tm Dn )
AE D = n =1
, where Dn = $3, 000
n
= $1, 200
Fundamentals of Engineering Economics, 3rd ed. 2012
4,800 (1.15n - 1)
AEC = + 2, 400 + 12, 000 - 1, 200
n n
4,800 (1.15n - 1)
= + 12, 000 + 1, 200
n n
1.15n 7, 200
= 12, 000 - + 1, 200
n n
n AEC
1 $ 7,800
2 $ 5,535
3 $ 4,884
4 $ 4,647
5 $ 4,587
6 $ 4,626
7 $ 4,731
8 $ 4,889
9 $ 5,091
10 $ 5,335
Fundamentals of Engineering Economics, 3rd ed. 2012
With i = 12% and tax rate = 40%: Economic service life = 1 year
Note: Here I am using an equation approach to generate the after-tax cash flows, since no
revenue figures are considered. Of course, we can always use an income statement
approach we have advocated.
12.34) Replacement analysis: Let X denote the current market value of the old call-
switching system:
Fundamentals of Engineering Economics, 3rd ed. 2012
12.35)
Defender:
Challenger:
Optimal time to replace: Since the remaining useful life for the defender is 3
years, which is the same as the physical life, keep the defender for 3 years.
12.36)
Decision: Do not replace the defender now.
Fundamentals of Engineering Economics, 3rd ed. 2012
12.37)
Option 1:
Fundamentals of Engineering Economics, 3rd ed. 2012
Fundamentals of Engineering Economics, 3rd ed. 2012
Option 2:
Select Option 1.
Fundamentals of Engineering Economics, 3rd ed. 2012
12.38)
The remaining useful life of the defender is 1 year. Its annual equivalent cost is $1,666.
When the defender is replaced now by the challenger, its equivalent annual cost is
$2,191, indicating that the defender should be kept for now.
Note: The purchase of a new machine will result in the combined savings in delays,
operation and repairs in the amount of $200 a year, so that the O&M cost for the new
machine will be reduced by $200 each year. For example, $1300 - $200 = $1,100 for n =
1.
Fundamentals of Engineering Economics, 3rd ed. 2012
12.39)
(a) and (b): Quintana should purchase the new equipment.
Fundamentals of Engineering Economics, 3rd ed. 2012
(c): Purchase the new equipment; (d): Retain the old machine
Fundamentals of Engineering Economics, 3rd ed. 2012
12.40)
Option 1: Keep the defender
Option 3: Keep the defender one year and switch to a brand new machine
(b) Answer is not provided. (Note: Analysis similar to Part(a) except that all cash flows will be truncated over 5 years.)