You are the head of Company AAA, which manufactures biomedical products. You are

Question

You are the head of Company AAA, which manufactures biomedical products. You are currently using a two-year-old system for the mixing, granulation and drying processes. They are considering to replace the entire system with a new technology which costs $80,000. It offers reduced annual operating and maintenance costs. As the head, you need to decide if and when you should replace the old system.

The old system could be currently sold to an external buyer for a price of $50,000. The market value at the end of year 5 is estimated to be $5,000. It is assumed that the system follows straight-line depreciation. The new system also follows a straight-line depreciation and has a market value of $45,000 at the end of five years of usage. The annual O&M costs for each system are given below. AAA uses a planning horizon of 5 years and a hurdle rate of 10%.

1. When is the best time to replace the old system with the new system?

2. What is the EUAC of the old system over the time of usage you determined in question 1?

3. What is the economic life of the new system?

4. What is the EUAC for the new system over the time of usage determined in question 1?

5. What is the EUAC of the production system for the entire 5-year planning horizon when putting your preferred plan into action?

Year Annual FIxed Expenses (old system) Annual fixed expenses (new system) 1 4000 3500 2 5000 3750 3 7000 4250 4 10000 5500 5 13000 7000

Explanation / Answer

The New system can be replaced. EUAC forrequiered are all calculated in the schedule above

DCF Year DF @10% Old System New System Old System New System 0      1.0000         (50,000)           (80,000)        (50,000)           (80,000) 1      0.9091           (4,000)             (3,500)           (3,636)             (3,182) 2      0.8264           (5,000)             (3,750)           (4,132)             (3,099) 3      0.7513           (7,000)             (4,250)           (5,259)             (3,193) 4      0.6830         (10,000)             (5,500)           (6,830)             (3,757) 5      0.6209           (8,000)             38,000           (4,967)             23,595        (74,825)           (69,636)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.