Steve Hausmann, a production engineer at Euro Fashion-USA, a European-style furniture company, was considering replacing a 1,000 lb capacity industrial fork- lift truck, which was purchased three years ago for $18,000. The truck was being used to move assembled furniture from the finishing department to the warehouse. Recently, the truck had not been dependable and had been frequently out of service while awaiting repairs, a situation that eventually cost the company $3,000. Maintenance expenses were rising steadily. When the truck was not available, the company had to rent one. In addition, thc forkliſt truck was diesel operated, and workers in the plant were complaining about the air pollution. If retained, the truck would have required an immediate engine overhaul to keep it in operable condition. The overhaul would have neither extended the originally estimated ser- vice life nor increased the value of the truck. Steve has found that the current truck has a book value of $0 (fully depreciated) and a market value of $7,500 today. Steve is considering an clectric forklift truck as a replacement, which would eliminate the air-pollution problem entirely. The new electric lift truck is quoted at $20,000. The equipment dealer will allow Steve $8,000 as trade-in on a new truck. What value(s) for the defender is (are) relevant in our analysis?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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As a challenger to the forklift truck described in Example 12.1, consider a new electric forklift truck that would cost $20,000, have operating costs of $6,000 in the first year, and have a salvage value or $14,000 at the end of the first year. For the remaining years, operating costs (including any loss of productivity due to maintenance) increase each year by 25% over the previous year's operating costs. Similarly, the salvage value declines each year by 30% from the previous year's salvage value. The truck has a maximum life or eight years without any major engine overhaul. The firm's required rate of return is 12%. Find the economic service life of this new machine without considering any income taxes.

Steve Hausmann, a production engineer at Euro Fashion-USA, a European-style
furniture company, was considering replacing a 1,000 lb capacity industrial fork-
lift truck, which was purchased three years ago for $18,000. The truck was being
used to move assembled furniture from the finishing department to the warehouse.
Recently, the truck had not been dependable and had been frequently out of
service while awaiting repairs, a situation that eventually cost the company $3,000.
Maintenance expenses were rising steadily. When the truck was not available, the
company had to rent one. In addition, thc forkliſt truck was diesel operated, and
workers in the plant were complaining about the air pollution. If retained, the
truck would have required an immediate engine overhaul to keep it in operable
condition. The overhaul would have neither extended the originally estimated ser-
vice life nor increased the value of the truck. Steve has found that the current truck
has a book value of $0 (fully depreciated) and a market value of $7,500 today.
Steve is considering an clectric forklift truck as a replacement, which would
eliminate the air-pollution problem entirely. The new electric lift truck is quoted at
$20,000. The equipment dealer will allow Steve $8,000 as trade-in on a new truck.
What value(s) for the defender is (are) relevant in our analysis?

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