You own several copiers that are currently valued at $11,000, combined. Annual operating and maintenance costs for all copiers are estimated at $8,000 next year, increasing by 10 percent each year thereafter. Salvage values decrease at a rate of 20 percent per year. You are considering replacing your existing copiers with new ones that have a suggested retail price of $26,000. Operating and maintenance costs for the new equipment will be $6,000 over the first year, increasing by 10 percent each year thereafter. The salvage value of the new equipment is well approximated by a 20 percent drop from the suggested retail price per year. Furthermore, you can get a trade-in allowance of $12,000 for your equipment if you purchase the new equipment at its suggested retail price. Your MARR is 8 percent. Should you replace your existing equipment now? Click the icon to view the table of compound interest factors for discrete compounding periods when i = 8%. year(s) with a total EAC of $ year(s) and a total EAC of $ You The economic life of the existing equipment is equipment, which has an economic life of equipment now. (Round to the nearest whole number as needed.) This is a total EAC than the new replace your existing

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Step 1: Define the given problem
To determine whether you should replace your
existing equipment with the new equipment, we
need to calculate the Equivalent Annual Cost
(EAC) for both options and compare them. The
option with the lower EAC is the more
economical choice.
Step 2: Choose the replacement to be done or
not
Let's start by calculating the EAC for your existing
equipment:
Calculate the annual operating and maintenance
cost for the existing equipment for the first year
and
and subsequent years:
Year 1: $8,000
Year 2: $8,000
1.10 $8,800
Year 3: $8,800
1.10 = $9,680
Year 4: $9,680 1.10 = $10,648
Year 5: $10,648*1.10 = $11,712
Calculate the salvage value for the existing
equipment for each year:
Year 1: $11,000 (initial value)
Year 2: $11,000 0.80 = $8,800
Year 3: $8,800 0.80 = $7,040
Year 4: $7,040 * 0.80 = $5,632
Year 5: $5,632 * 0.80 = $4,506
Calculate the net cash flow for each year by
subtracting the annual operating and
maintenance cost from the salvage value:
Year 1: $11,000 - $8,000 $3,000
real 1.
Year 2: $8,800-$8,800 = $0
Year 3: $7,040 - $9,680=-$2,640
Year 4: $5,632-$10,648=-$5,016
Wear
Year 5: $4,506-$11,712=-$7,206
Calculate the present value (PV) of these cash
Flore
flows at a 8% MARR (Minimum Acceptable Rate of
Return):
Year 1
Year 1: $3,000/(1+0.08) = $2,777.78 (rounded to
the nearest cent)
the near
Year 2: $0/(1+0.08)^2 = $0
Year 3:-$2,640/(1+0.08)^3=-$2,095.16
(rounded to the nearest cent)
Year 4:-$5,016/(1+0.08)^4 =-$3,686.90
(rounded to the nearest cent)
Year 5:-$7,206/(1+0.08)^5=-$4904.28 (rounded
to the nearest cent)
Calculate the EAC for the existing equipment:
EAC existing (PV Year 1 + PV Year 2 + PV Year 3+
PV Year
Year 4 + PV Year 5) / Annuity Factor (8%, 5
years)
years)
Using the annuity factor for 8% and 5 years from
a financial table or calculator, we get:
Annuity Factor (8%, 5 years) = 3.993
EAC existing (2,777.78 + $0-2,095.16-3,686.90
-4904.28)/3.993
=-$1980.61 (rounded to the nearest cent)
Now, let's calculate the EAC for the new
equipment:
Calculate the net cash flow for each year for the
cance
new equipment. This includes the initial cost,
operating and maintenance costs, and salvage
values:
Year 1: Initial Cost - Operating Cost-$26,000-
$6,000-$20,000
Year 2: $20,000 - ($6,000
Year 3: $13,400 - ($6,000
Year 4: $6,140- ($6,000
Year 5: $-1846-($6,000 1.10^4) = -$10330
Calculate the present value (PV) of these cash
flows at an 8% MARR:
1.10) = $13,400
1.10^2) = $6,140
1.10^3) =$-1846
MAN
Year 1: $20,000/(1+0.08) = $18,518.52 (rounded.
real 1.920,000
to the nearest cent)
Year 2: $13,400/(1+0.08)^2 = $11,488.34
(rounded to the nearest cent)
Year 3: $6140/(1+0.08)^3 = $4874.13 (rounded
to the nearest cent)
Year 4: $-1846/(1+0.08)^4 =-$1356.87 (rounded
to the nearest cent)
Year 5:-$10330/(1+0.08)^5=-$7030.42
(rounded to the nearest cent).
Calculate the EAC for the new equipment:
EAC new (PV Year 1 + PV Year 2 + PV Year 3 + PV
Year 4+ PV Year 5) / Annuity Factor (8%, 5 years)
Using the same annuity factor as before (8%, 5
years), we get:
EAC new (18,518.52 + 11,488.34 +4874.13 -
1356.87-7030.42)/3.993
= $6635.04 (rounded to the nearest cent)
Now, let's compare the EAC for the existing
equipment (-$1980.61) and the new
equipment ($6635.04):
Since the EAC for the existing equipment is
negative, it means that keeping the existing
equipment is the more economical choice.
Therefore, you should not replace your
existing equipment with the new equipment
now.
Transcribed Image Text:Step 1: Define the given problem To determine whether you should replace your existing equipment with the new equipment, we need to calculate the Equivalent Annual Cost (EAC) for both options and compare them. The option with the lower EAC is the more economical choice. Step 2: Choose the replacement to be done or not Let's start by calculating the EAC for your existing equipment: Calculate the annual operating and maintenance cost for the existing equipment for the first year and and subsequent years: Year 1: $8,000 Year 2: $8,000 1.10 $8,800 Year 3: $8,800 1.10 = $9,680 Year 4: $9,680 1.10 = $10,648 Year 5: $10,648*1.10 = $11,712 Calculate the salvage value for the existing equipment for each year: Year 1: $11,000 (initial value) Year 2: $11,000 0.80 = $8,800 Year 3: $8,800 0.80 = $7,040 Year 4: $7,040 * 0.80 = $5,632 Year 5: $5,632 * 0.80 = $4,506 Calculate the net cash flow for each year by subtracting the annual operating and maintenance cost from the salvage value: Year 1: $11,000 - $8,000 $3,000 real 1. Year 2: $8,800-$8,800 = $0 Year 3: $7,040 - $9,680=-$2,640 Year 4: $5,632-$10,648=-$5,016 Wear Year 5: $4,506-$11,712=-$7,206 Calculate the present value (PV) of these cash Flore flows at a 8% MARR (Minimum Acceptable Rate of Return): Year 1 Year 1: $3,000/(1+0.08) = $2,777.78 (rounded to the nearest cent) the near Year 2: $0/(1+0.08)^2 = $0 Year 3:-$2,640/(1+0.08)^3=-$2,095.16 (rounded to the nearest cent) Year 4:-$5,016/(1+0.08)^4 =-$3,686.90 (rounded to the nearest cent) Year 5:-$7,206/(1+0.08)^5=-$4904.28 (rounded to the nearest cent) Calculate the EAC for the existing equipment: EAC existing (PV Year 1 + PV Year 2 + PV Year 3+ PV Year Year 4 + PV Year 5) / Annuity Factor (8%, 5 years) years) Using the annuity factor for 8% and 5 years from a financial table or calculator, we get: Annuity Factor (8%, 5 years) = 3.993 EAC existing (2,777.78 + $0-2,095.16-3,686.90 -4904.28)/3.993 =-$1980.61 (rounded to the nearest cent) Now, let's calculate the EAC for the new equipment: Calculate the net cash flow for each year for the cance new equipment. This includes the initial cost, operating and maintenance costs, and salvage values: Year 1: Initial Cost - Operating Cost-$26,000- $6,000-$20,000 Year 2: $20,000 - ($6,000 Year 3: $13,400 - ($6,000 Year 4: $6,140- ($6,000 Year 5: $-1846-($6,000 1.10^4) = -$10330 Calculate the present value (PV) of these cash flows at an 8% MARR: 1.10) = $13,400 1.10^2) = $6,140 1.10^3) =$-1846 MAN Year 1: $20,000/(1+0.08) = $18,518.52 (rounded. real 1.920,000 to the nearest cent) Year 2: $13,400/(1+0.08)^2 = $11,488.34 (rounded to the nearest cent) Year 3: $6140/(1+0.08)^3 = $4874.13 (rounded to the nearest cent) Year 4: $-1846/(1+0.08)^4 =-$1356.87 (rounded to the nearest cent) Year 5:-$10330/(1+0.08)^5=-$7030.42 (rounded to the nearest cent). Calculate the EAC for the new equipment: EAC new (PV Year 1 + PV Year 2 + PV Year 3 + PV Year 4+ PV Year 5) / Annuity Factor (8%, 5 years) Using the same annuity factor as before (8%, 5 years), we get: EAC new (18,518.52 + 11,488.34 +4874.13 - 1356.87-7030.42)/3.993 = $6635.04 (rounded to the nearest cent) Now, let's compare the EAC for the existing equipment (-$1980.61) and the new equipment ($6635.04): Since the EAC for the existing equipment is negative, it means that keeping the existing equipment is the more economical choice. Therefore, you should not replace your existing equipment with the new equipment now.
You own several copiers that are currently valued at $11,000, combined. Annual operating and maintenance costs for all
copiers are estimated at $8,000 next year, increasing by 10 percent each year thereafter. Salvage values decrease at a rate
of 20 percent per year. You are considering replacing your existing copiers with new ones that have a suggested retail price
of $26,000. Operating and maintenance costs for the new equipment will be $6,000 over the first year, increasing by 10
percent each year thereafter. The salvage value of the new equipment is well approximated by a 20 percent drop from the
suggested retail price per year. Furthermore, you can get a trade-in allowance of $12,000 for your equipment if you purchase
the new equipment at its suggested retail price. Your MARR is 8 percent. Should you replace your existing equipment now?
Click the icon to view the table of compound interest factors for discrete compounding periods when i = 8%.
The economic life of the existing equipment is
equipment, which has an economic life of
equipment now.
(Round to the nearest whole number as needed.)
year(s) with a total EAC of $
year(s) and a total EAC of $ You
This is a
total EAC than the new
replace your existing
Transcribed Image Text:You own several copiers that are currently valued at $11,000, combined. Annual operating and maintenance costs for all copiers are estimated at $8,000 next year, increasing by 10 percent each year thereafter. Salvage values decrease at a rate of 20 percent per year. You are considering replacing your existing copiers with new ones that have a suggested retail price of $26,000. Operating and maintenance costs for the new equipment will be $6,000 over the first year, increasing by 10 percent each year thereafter. The salvage value of the new equipment is well approximated by a 20 percent drop from the suggested retail price per year. Furthermore, you can get a trade-in allowance of $12,000 for your equipment if you purchase the new equipment at its suggested retail price. Your MARR is 8 percent. Should you replace your existing equipment now? Click the icon to view the table of compound interest factors for discrete compounding periods when i = 8%. The economic life of the existing equipment is equipment, which has an economic life of equipment now. (Round to the nearest whole number as needed.) year(s) with a total EAC of $ year(s) and a total EAC of $ You This is a total EAC than the new replace your existing
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