uppose that you purchased a HVAC system five years ago for $75, 000. The O&M costs are $15, 000 this year and are expected to increase by $1, 000 each year for the next five years then remain the same for the following years. The current salvage value of the system is $15, 000; salvage value after one year is estimated to be $12, 000; after two years, $11, 000; after three years, $10, 000; after four years, $9, 000; and so on. A new industrial HVAC system is available for purchase at a price of $95, 000, including instal- lation. The market value of the new system will decrease at a rate of 15% each year. The O&M costs are expected to be $1, 000 in the first year, and will increase at a rate of 20% each year. The maximum service life of the new system is 10 years. Assume that your company uses an interest rate of 10% for all project evaluations. (a) Find the remaining economic life of the currently owned asset. (b) What is the economic service life of the new system? (c) Use the replacement analysis to determine the earliest year in which the current system should be replaced with the new one.
uppose that you purchased a HVAC system five years ago for $75, 000. The O&M
costs are $15, 000 this year and are expected to increase by $1, 000 each year for the next five years
then remain the same for the following years.
The current salvage value of the system is $15, 000; salvage value after one year is estimated to
be $12, 000; after two years, $11, 000; after three years, $10, 000; after four years, $9, 000; and so on.
A new industrial HVAC system is available for purchase at a price of $95, 000, including instal-
lation. The market value of the new system will decrease at a rate of 15% each year. The O&M
costs are expected to be $1, 000 in the first year, and will increase at a rate of 20% each year. The
maximum service life of the new system is 10 years. Assume that your company uses an interest
rate of 10% for all project evaluations.
(a) Find the remaining economic life of the currently owned asset.
(b) What is the economic service life of the new system?
(c) Use the replacement analysis to determine the earliest year in which the current system should
be replaced with the new one.
(Method: Excel.
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