The Ajax Corporation owns a crane with an estimated remaining life of 10 years. The crane can now be sold for $8,000. If it stays in service it should get a major repair costing $4,000. After the fix, you will have operating and maintenance costs of $3,000 per year. Once repaired, the crane will have a market value of zero at the end of the 10-year study period. A new crane would cost $18,000, last 10 years, and have a market value of $4,000 at the end of that term. The operating and maintenance expenses for this new machine would be $1,000 per year. To evaluate its investment alternatives, the company uses an interest rate of 10% per year before taxes. Should the company replace the old crane?
The Ajax Corporation owns a crane with an estimated remaining life of 10 years. The crane can now be sold for $8,000. If it stays in service it should get a major repair costing $4,000. After the fix, you will have operating and maintenance costs of $3,000 per year. Once repaired, the crane will have a market value of zero at the end of the 10-year study period. A new crane would cost $18,000, last 10 years, and have a market value of $4,000 at the end of that term. The operating and maintenance expenses for this new machine would be $1,000 per year. To evaluate its investment alternatives, the company uses an interest rate of 10% per year before taxes. Should the company replace the old crane?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The Ajax Corporation owns a crane with an estimated remaining life of 10 years. The crane can now be sold for $8,000. If it stays in service it should get a major repair costing $4,000. After the fix, you will have operating and maintenance costs of $3,000 per year. Once repaired, the crane will have a market value of zero at the end of the 10-year study period. A new crane would cost $18,000, last 10 years, and have a market value of $4,000 at the end of that term. The operating and maintenance expenses for this new machine would be $1,000 per year. To evaluate its investment alternatives, the company uses an interest rate of 10% per year before taxes. Should the company replace the old crane?
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