Three years ago, Witt Gas Controls purchased equipment for $80,000 that was expected to have a useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing $30,000 one year ago. Technology changes now require that the equipment be upgraded again for another $25,000 so that it can be used for 3 more years. Its annual operating cost will be $48,000 and it will have a $19,000 salvage value after 3 years. Alternatively, it can be replaced with new equipment that will cost $68,000 with operating costs of $35,000 per year and a salvage value of $21,000 after 3 years. If replaced now, the existing equipment will be sold for $12,000. (a) Calculate the annual worth of the defender at an interest rate of 10% per year. (b) Determine the AW of the challenger over 3 years and select it or the defender.
Three years ago, Witt Gas Controls purchased equipment
for $80,000 that was expected to have a useful
life of 5 years with a $9000 salvage value. Increased
demand necessitated an upgrade costing $30,000 one
year ago. Technology changes now require that the
equipment be upgraded again for another $25,000 so
that it can be used for 3 more years. Its annual operating
cost will be $48,000 and it will have a $19,000
salvage value after 3 years. Alternatively, it can be
replaced with new equipment that will cost $68,000
with operating costs of $35,000 per year and a salvage
value of $21,000 after 3 years. If replaced now,
the existing equipment will be sold for $12,000.
(a) Calculate the annual worth of the defender at
an interest rate of 10% per year.
(b) Determine the AW of the challenger over
3 years and select it or the defender.
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