Chapter 11, Problem 005 specialty concrete mixer used in construction was purcha

Question

Chapter 11, Problem 005 specialty concrete mixer used in construction was purchased for $300,000 7 years ago. Its annual OSM costs are $105,000. At the end of the 8- year planning horizon, the mixer will have a salvage value of $5,000. If the mixer is replaced, a new mixer will require an initial investment of $375,000. At the end of the 8-year planning horizon, it will have a salvage value of $45,000. Its annual 08M cost will be only $40,000 due to newer tech market value of $65,000. sing an EUAC measure and a MARR of 15% to see if the concrete mixer should be replaced if the old mixer is sold for its Click here to access the TVM Factor Table Calculator Use the cash flow approach (insider's viewpoint approach). Show the EUAC values used to make your decision: Existing concrete mixer: New concrete mixer: $ Replace concrete mixer? Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is Use the opportunity cost approach (outsider's viewpoint approach) Show the EUAC values used to make your decision: Existing concrete mixer: New concrete mixer: s$

Explanation / Answer

Part-1 Cssh Flow Approach Particular Existing Conrete Mixer New Conrete Mixer Annual O&M Cost 105000 40000 Initial Investment Required 300000 375000 Salvage Value 50000 45000 Life 8 Year 8 Year Computation of NPV forExisting Concrete Mixer Year Casflows PVAF@ 15% Present value of Cahs flow 0 -$300,000.00                             1.0000 -$300,000.00 1-8 -$105,000.00                             4.4873 -$471,166.50 8 $5,000.00                             0.3269 $1,634.50 NPV for Existing Concrete Mixer -$769,532.00 Computation of NPV for New Concrete Mixer Year Casflows PVAF@ 15% Present value of Cahs flow 0 -$375,000.00 1 -$375,000.00 1-8 -$40,000.00 4.4873 -$179,492.00 8 $45,000.00 0.3269 $14,710.50 NPV for New Concrete Mixer -$539,781.50 Hence as per Cash Flow Approcah it's advisable to replace Existing Concrete Mixer Part-2 Opportunity Cost Approach Detail Amount Calculation Initial Investment Required $310,000.00 $375000-$65000 Reduction in Annual Cost $65,000.00 $105000-$40000 Incremental Salvage value $40,000.00 $45000-$5000 NPV= $65000*PVIFA(15%,8)+$40000*PVIF(15%,8)-$310000 =$65000*4.4873+$40000*0.3269-$310000 =$304751-$310000 = -$5249 NPV through Opportunity Approach= -$5249 NPV is Negative, hence Replacement of Existing concrete Mixer with new Concrete Mixer is not Viable

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