ENGG 209 Lecture Notes - Lecture 20: Islamic Iran Participation Front, Mansfield, Sunk Costs

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Challenger: the best available replacement piece of equipment. Always assume asset class continues in replacement analysis. Always assume the replaced asset is sold at the beginning of year n+1. Example: a pump (class 8-20% cca) bought three years ago cost . A major overhaul was just completed at a cost of . The annual operating cost is , and the current market value is. Calculate pe and ae of cash flows over the useful life of the defender and challenger. Example: suppose the pump from the previous example is expected to last three more years after which it is salvaged for . A new pump (also expected to last three years) could be purchased for . This new pump would reduce operating costs by 50% and could be salvaged for after three years. Marr = 10%, t = 40%, cca = 20%, ctfii = ctf1/2 = 0. 7455. Pe operating costs = 0. 6x1000x(p/a, 10, 3) = 1492.

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