Clive suppliers bought a forklift four years ago for $ 26,000. The market value

Question

Clive suppliers bought a forklift four years ago for $ 26,000. The market value of this type of forklift is $12,000. If upgraded for $8,000, the forklift is expected to be in use for 7 more years, after which it can be sold for $3,000. Clive suppliers have the alternative of purchasing a new forklift at the cost of $30,000. This new equipment has an expected life of 10 years and a salvage value of $6,000. Using a MARR of 12% per year, calculate the AW and make a decision on whether the company should upgrade or replace.

a)AW of defender = ($4,680), AW of challenger = ($5,651). Upgrade

b)AW of defender = ($4,085), AW of challenger = ($4,680). Replace

c)AW of defender = ($5,651), AW of challenger = ($4,968). Replace

d)AW of defender = ($4,085), AW of challenger = ($4,968). Upgrade

Explanation / Answer

Find the AW of challenger = 30000(A/P, 12%, 10) - 6000(A/F, 12%, 10) = $4967

Find the AW of defender = (12000 + 8000)*(A/P, 12%, 7) - 3000(A/F, 12%, 7) = $4085

Since the annual equivalent cost is greater for challenger we use defender now. Option D is correct

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