1· (10points) The Ajax Corporation has an overhead crane tha remaining life of 1

Question

1· (10points) The Ajax Corporation has an overhead crane tha remaining life of 10y in service, it must be overhauled immediately at a cost of $5,000. Operating maintenance costs will be $3,000 per year after the crane is overhaul overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,000 MV at that time. Operating and maintenance costs are $1,000 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives. Should the company replace the old crane? t has an estimated ears. The crane can be sold now for $8,000. If the crane is kept ed. The

Explanation / Answer

1. Since the existing can be sold now for $8,000 and needs to be serviced immediately at a cost of • Existing crane:

$5,000, the present cost of the existing crane is equal to $8,000 + 5,000 = $13,000.

Present worth of existing crane PW = -$13,000 – 3,000(P/A,10%,8) + 3,000(P/F,10%,8)

(Though the estimated life is 10 years, at the end of the 8th year is zero. So, the useful life is taken as 8 years)

PW = -$13,000 – 3,000*5.3349

PW = -$13,000 – 16,004.70

Present worth of existing crane = -$29,004.70.

• New crane:

Present worth = -$20,000 -1,000(P/A,10%,8) + 4,000(P/F,10%,8)

Present worth = -$20,000 – 1,000*5.3349 + 4,000*0.4665

Present worth = -$20,000 – 5,334.9 + 1,866

Present worth of a new crane = -$23,468.9.

• Since the present worth of new crane is greater in value than that of the existing crane, the existing crane should be replaced.

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