5. (10 pts) A piece of equipment was purchased two years ago for $40,000. At the

Question

5. (10 pts) A piece of equipment was purchased two years ago for $40,000. At the present time, it can be sold for $22,000 and replaced by a newer model, having a purchase price of $39,500; or it can be kept in service for a maximum of one more year. The new piece of equipment, if purchased, has a useful life of not more than two years. The projected resale values and operating and maïntenance costs for the challenger is shown in the accompanying table. The before-tax MARR is 18%. Complete the data table for the challenger. Challenger Annual Expenses Cost Loss in Total Margin Cost of Capital 18% Year MV MV EUAC 0 $39,500 2 $8,500 $ 2300 26026 222,000 t )11,000 2

Explanation / Answer

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Challenger Year MV Loss in MV by retaining for 1 more yr.(previous yr.MV-Current Yr. MV) Loss of Interest on money tied up(previous MV in 2*18%) Annual expenses Total marginal cost Annuity factor (1-(1.18^-n)/0.18 EUAC 1 2 3 4 5 6=3+4+5 7 6/7 0 39500 1 28000 11500 7110 8500 27110 0.847458 31990 2 22000 17500 5040 11000 33540 1.565642 21423

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