Please show hand Calculation, NO SPREAD SHEET please. A steel fabrication plant

Question

Please show hand Calculation, NO SPREAD SHEET please.

A steel fabrication plant in Southern Ontario is studying a replacement decision for its old laser cutter, purchased 7 years ago at $130, 000, with a new more precise laser cutter. Based on market studies, the old laser cutter will have to be replaced some time before the end of the fourth year. The market value of the old laser cutter is currently estimated at $49, 000. Other related data for the old laser cutter are summarized in the table below. The MARR is 10%. Determine the EAC (Equivalent Annual Cost) for the old laser cutter over one year, two years, three years and four years of remaining service life. Determine the remaining economic life of the old laser cutter If the EAC of the new laser cutler is 535, 000, should the plant replace the old cutter with the new one now? What could be considered as a "sunk cost" in this example? (no calculations are needed)

Explanation / Answer

ANSWER IS GIVEN IN SPREAD SHEET WITH FULL EXPLANATIONS FOR CALCULATION AT ALL RELEVANT POINTS TO FACILITATE TO UNDERSTAND THE PROCESS.

a) Equivalent Annual Cost for remaining life of years 1,2,3 &4. 0 1 2 3 4 Initial cost (opportunity cost) 49000 O&M cost 17000 21320 26806 33774 pvif @ 10% 1.0000 0.9091 0.8264 0.7513 0.6830 pv of O&M costs 15455 17620 20140 23068 (17000*0.9091 and so on for each year) cumulative PV of O&M costs 15455 33074 53214 76282 (15455+17620) (33074+20140) (53214+23068) Salvage value 31500 19875 15656 6742 pv of salvage value 28636 16426 11763 4605 (31500*0.9091) (19875*.8264) and so on Net Present Value (cum pv of O&M costs-pv of salvage value - initial cost) 35818 65649 90452 120677 (15455-28636+49000) pvifa @ 10% 0.9091 1.7355 2.4869 3.1699 Equivalent Annual cost 39400 37826 36372 38070 (35181/.9091) (65649/1.7355) and so on. b) The economic life of the old laser cutter is 3 years as the EAC is lowest for that period. c) Since the EAC of the new laser cutter of $35000 is lower than the EAC of the old one, the old laser cutter should be replaced immediately. d) The Book value of the old laser cutter is the sunk cost-a cost that has been incurred in the past is irrelevant for the current decision making. However, the current salvage value of the old equipment should be considered as the opportunity cost at t=0.

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