Question 1. (24 points) One of the four ovens at a bakery is being considered fo

Question

Question 1. (24 points) One of the four ovens at a bakery is being considered for replacement. Its market value costs are given in the table below for several years. A new oven costs $80,000 and this price includes a complete guarantee of the maintenance costs for the first two years, and it covers a good proportion maintenance costs for years 3 and 4. The market value and maintenance costs are also table. and ma of the summarized in the Old Overn New Oven End of MV, End k | of Year, k $20,000 1 17,000 MV, End of Year, k Annual Annual Expenses (E.? $9,500 9,600 14000 9.700 9,800 Expenses $80,000 75,000 70,000 66,000 62,000 So 0 1,000 3,000 3 11,000 7,000 the old and new oven s have similar productivities and energy costs. Both a) b) If the before-tax MARR is 15% service if purchased? Find the economic life of the old oven. When should the oven be replaced? per year, for how many years should the new workstation be retained in c)

Explanation / Answer

For part b) The economic life of old oven is 3 years which is when its equivalent uniform annual cost is minimumin 3rd year

For n = 1, 2, 3 and 4 years find the EUAC

EUAC (n = 1) = [20000 + 9500(P/A, 15%, 1) + 100(P/G, 15%, 1) – 17000(P/F, 15%, 1)](A/P, 15%, 1)

= 15,500

EUAC (n = 2) = [20000 + 9500(P/A, 15%, 2) + 100(P/G, 15%, 2) – 14000(P/F, 15%, 2)](A/P, 15%, 2)

= 15,337.21

EUAC (n = 3) = [20000 + 9500(P/A, 15%, 3) + 100(P/G, 15%, 3) – 17000(P/F, 15%, 3)](A/P, 15%, 3)

= 15,182.51

EUAC (n = 4) = [20000 + 9500(P/A, 15%, 4) + 100(P/G, 15%, 4) – 17000(P/F, 15%, 4)](A/P, 15%, 4)

= 15,236.08

For part a) using the same method, the economic life is 3 years so it should be retained for 3 years

Part c) The oven should not be replaced because the EUAC of old oven is smaller than EUAC of new oven so that new oven is expensive.

Old oven Year Annual cost Salvage value PV of the annual cost PV of the market value Net present value EUAC 1 9500 17000 8260.87 14782.61 13478.26 15500.00 2 9600 14000 15519.85 10586.01 24933.84 15337.21 3 9700 11000 21897.76 7232.68 34665.08 15182.51 4 9800 7000 27500.94 4002.27 43498.67 15236.08

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