The Ajax Corporation has an overhead crane that has an estimated remaining life
ID: 2760905 • Letter: T
Question
The Ajax Corporation has an overhead crane that has an estimated remaining life of 10 years. The crane can be sold now for $8,000. If the crane is kept in service, it must be overhauled immediately at a cost of $5,000.
Operating and maintenance costs will be $3,000 per year after the crane is overhauled. The overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,000 MV at that time. Operating and maintenance costs are $1,000 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives.
Should the company replace the old crane?
Explanation / Answer
Old Crane
The investment Value of Old Crane to the outsider of its current Market Value (MV) plus the overhauls's cost to keep the old crain running
Capital Investment =
=8000+5000
= $ 13,000
Anual OM = $ 3,000
Market Value at the end of the10 year = 0
NPV= 8000+5000+3000 (A/P, 10%,10)
=13000+18433.68
=31433
Now if the company purchase new Machine
Company should puchase new crane because net cash outflow is low in new crane
company replace the old crane
Salvage NetCash Flow PV Factor
@ 10% 0 -20000 8000 -12000 1 -12000 1 -1000 -1000 0.909091 -909.091 2 -1000 -1000 0.826446 -826.446 3 -1000 -1000 0.751315 -751.315 4 -1000 -1000 0.683013 -683.013 5 -1000 -1000 0.620921 -620.921 6 -1000 -1000 0.564474 -564.474 7 -1000 -1000 0.513158 -513.158 8 -1000 -1000 0.466507 -466.507 9 -1000 -1000 0.424098 -424.098 10 -1000 4000 3000 0.385543 1156.63 11 -1000 -16602.4
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.