ENGINEERING ECONOMIC ENHANCED EBOOK
ENGINEERING ECONOMIC ENHANCED EBOOK
14th Edition
ISBN: 9780190931940
Author: NEWNAN
Publisher: OXF
Question
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Chapter 13, Problem 48P
To determine

The firm whether keeps its old forklift truck for the present or replace it now with the new one.

Expert Solution & Answer
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Answer to Problem 48P

The company should not replace the truck.

Explanation of Solution

Calculate the net present value of old truck.

Year Cost of maintenance(A) Tax saving (B)(A×0.4) After tax cash flow (C)(AB) Discount rate 8% (D) (1(1+i)n) Net present value (C×D)
0
1 $400 $160 $240 0.9259 $222.216
2 $600 $240 $360 0.8573 $308.628
3 $800 $320 $480 0.7938 $381.024
4 $1000 $400 $600 0.7350 $441
5 $1400 $560 $840 0.6806 $571.704
6 $1400 $560 $840 0.6301 $529.284
7 $1400 $560 $840 0.5835 $490.14
8 $1400 $560 $840 0.5403 $453.852
9 $1400 $560 $840 0.5002 $420.168
10 $1400 $560 $840 0.4632 $389.088
Total NPV $4206

Write the equation for straight line depreciation.

Depreciation=BSN ...... (I)Here, total cost is B, salvage value is S, and life is N.

Substitute $6500 for B, $0 for S, and 10 years for N in Equation (I).

Depreciation=$6500010=$650

Calculate the net present value of New truck.

Year Cost of maintenance(A) Depreciation(B) Total cost(C) Tax saving (D)(C×0.4) After tax cash flow (E)(CD) Cash out flow (F)(EB) Discount rate 8% (G) (1(1+i)n) Net present value (F×G)
0 $6500
1 $50 $650 $700 $280 $420 $230 0.9259 $213
2 $50 $650 $700 $280 $420 $230 0.8573 $197.2
3 $50 $650 $700 $280 $420 $230 0.7938 $182.6
4 $50 $650 $700 $280 $420 $230 0.7350 $169
5 $50 $650 $700 $280 $420 $230 0.6806 $156.5
6 $50 $650 $700 $280 $420 $230 0.6301 $145
7 $50 $650 $700 $280 $420 $230 0.5835 $134.2
8 $50 $650 $700 $280 $420 $230 0.5403 $124.3
9 $50 $650 $700 $280 $420 $230 0.5002 $115
10 $50 $650 $700 $280 $420 $230 0.4632 $106.5
Total NPV $4957

Hence, the NPV of New truck is negative. So, it is not economically beneficial to replace the truck.

Conclusion:

Therefore, the company should not replace the truck.

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