The Draper Company has an existing injection molding unit that has a current man

Question

The Draper Company has an existing injection molding unit that has a current mantel value of $90,000 and would like to know when it should be replaced. The estimated salvage value at the end of year-1 is $55,000 and will decrease by $5,000 each year thereafter. The operating and maintenance expenses for year-1 are estimated to be $30,000 and will increase by $3,000 each year thereafter. The interest rate is 8%. Calculate the Annual Equivalent Cost (AEC) for each year to determine when to replace to the equipment. When should the equipment be replaced?

Explanation / Answer

Solution:

Thank you.

O&M P/F factor Present value Cumulative A/P factor OC for AEC 8% 1 30000 0.926 27777.78 27777.78 0.926 30000 2 33000 0.857 28292.18 56069.96 1.783 31442.30769 3 36000 0.794 28577.96 84647.92 2.577 32846.22967 4 39000 0.735 28666.16 113314.08 3.312 34211.87933 5 42000 0.681 28584.49 141898.58 3.993 35539.41477 6 45000 0.630 28357.63 170256.21 4.623 36829.0381 7 48000 0.583 28007.54 198263.75 5.206 38080.99463 8 51000 0.540 27553.71 225817.46 5.747 39295.57182 9 54000 0.500 27013.44 252830.91 6.247 40473.09815 10 57000 0.463 26402.03 279232.94 6.710 41613.94174

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