Using the Present Worth information given below for both the defender and the ch
ID: 1121032 • Letter: U
Question
Using the Present Worth information given below for both the defender and the challenger for different number of years, determine when the defender should be replaced
Years Kept/Used
DEFENDER
(PW if kept/Used for stated number of years ($))
CHALLENGER
(PW if kept/Used for stated number of years ($))
-30,000
100,000
-72,000
-110,000
-112,000
-121,000
-151,000
-133,000
-172,000
-145,000
A.Keep the defender for 2 years then replace it with the challenger
B.Keep the defender for all 5 years
C.Keep the defender for 4 years then replace it with the challenger
D.Replace the defender now
Years Kept/Used
DEFENDER
(PW if kept/Used for stated number of years ($))
CHALLENGER
(PW if kept/Used for stated number of years ($))
1-30,000
100,000
2-72,000
-110,000
3-112,000
-121,000
4-151,000
-133,000
5-172,000
-145,000
Explanation / Answer
a) Defender
Year(n) Known and forecasted cash flows If machine is sold in year,n its
Overhaul Cost Forecasted net profit Salvage Value Present worth is Annual Equivalent worth is
0 -$25000
1 $38000 $20000 $33000*0.9091=$30000 $30000/0.909=$33000
2 $33000 $10000 $36000*0.8265=$29754 $29754/1.7356 =$17143
b) Challenger
Year(n) Known and forecasted cash flows If machine is sold in year,n its
Overhaul Cost Forecasted net profit Salvage Value Present worth is Annual Equivalent worth is
0 -$55000
1 $44000 $30000 $19000*0.909=$17273 $17273
2 $44000 $20000 $53000*0.8265=$43805 $43805/1.7356=$25239
b.Economic Service Life of the defender is 2 years.
c.Economic service life of the challenger is 2 years.
d.The defender must be replaced by the challenger.
e.If defender must be replaced by the challenger, it should be done at the end of year 1 ($33000-$17273=$15727) and at the end of year 2($33000+$17143-$17273-$25239=$7631).
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