Your office block has a central air-conditioning plant. Your mechanical service
ID: 2613787 • Letter: Y
Question
Your office block has a central air-conditioning plant. Your mechanical service provider advised that due to the increasing maintenance cost of the plant, he would have to consider replacing the plant with split units for each office. The replacement with split units would cost approx. R1 000 000 and the cost is increasing by 7.5% per year. Currently the maintenance cost is approx. R15 000 per month for the central plant, and replacing it with split units would reduce the maintenance cost to R5 000 per month. Accept that there is no escalation in the cost of maintenance. If your opportunity cost is 12% per year, motivate if you would replace the A/C plant and if it is the best option to do it now or in 5 years’ time. (5)
Explanation / Answer
If replaced now:
Cost =1000,000
If done in 5 Years:
Cost = 1000,000*(1+0.075)5 = 1435,630
PV = 1435,630*PVF(12%, 5years) = 1435,630*0.567
= 814,002
Total Cost if Done after 5 years = Cost of Replacement + Extra Maintenance Cost incurred for 5 years
= 814002+ 10,000*PVAF(12%, 5years)
814002+10,000*3.605
850,052
Hence, Plant should be replaced in 5 years time because of lower cost
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