Lumberjack Power, operator of a nuclear power plant, is planning to replace its current equipment with some that is more environmentally friendly. The old equipment has annual operating expenses of $6750 and can be kept for 8 more years. The equipment will have a salvage value of $4000, if sold 8 years from now, and has a current market value of $24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of $6250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operation. If the company's MARR is 15% per year, should the equipment be replaced? Use a study period of 8 years.
Lumberjack Power, operator of a nuclear power plant, is planning to replace its current equipment with some that is more environmentally friendly. The old equipment has annual operating expenses of $6750 and can be kept for 8 more years. The equipment will have a salvage value of $4000, if sold 8 years from now, and has a current market value of $24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of $6250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operation. If the company's MARR is 15% per year, should the equipment be replaced? Use a study period of 8 years.
Related questions
This is a decision to keep or replace current equipment, mutually exclusive alternatives. The question asks for the difference in the net present values of the two alternatives, not the net present value of one or the other. Use the present value tables on page 118 to compute present values.
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Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2012 for $200,000. It is now early in 2015, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current equipment will last for six more years with zero disposal value at that time. It can be sold immediately for $40,000. The following are last year's per-unit manufacturing costs, when production was 7,600 ships:
| Direct materials | $3.60 |
| Direct labor | 3.55 |
| Variable overhead | 1.55 |
| Fixed overhead | 4.70 |
| Total unit cost | $13.40 |
The cost of the new equipment is $145,000. It has a six year useful life with an estimated disposal value at that time of $35,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead to be reduced by $2.25 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.17 more per unit. Fixed overhead costs will decrease by $4,300.
Finley expects production to increase to 8,000 ships in each of the next six years. Assume a discount rate of 5%.
REQUIRED
1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment?
Question
A company is considering replacing an existing machine (defender) with newer machine (challenger). If repaired, the defender can be used for another 5 years. After that, it cannot be used and must be replaced regardless of economic value. The current market value of the defender is $7,500 (i.e., it can be sold now for $7,500). The defender will have a salvage value after 5 years of $500. If kept, the defender will require an immediate $1,500 overhaul. The characteristics of the Defender are presented in the following table:
| year | Operating Cost | Maintenance Cost | Market Value |
| 0 | - | 1500 | 7500 |
| 1 | 2000 | 200 | 4800 |
| 2 | 2700 | 300 | 3200 |
| 3 | 3800 | 500 | 2000 |
| 4 | 5000 | 1000 | 1200 |
| 5 | 6500 | 2000 | 500 |
The new machine (Challenger) has a service life of 7 years. It will cost $16,000 to purchase now. Its annual operation and maintenance cost combined is $1,600 per year in the first year. This annual operation and maintenance cost will increase by 42% per year for subsequent years. The market value of the challenger will decline by 22% every year over its service life. Use MARR equals 12%. a] Find the economic lives of: [i] the defender and [ii] the challenger. b] Determine when the defender should be replaced. Clearly show your calculations steps.
