The CN Railroad is considering replacement
of a Montreal Power Jack Tamper, used for maintenance of track, with a
new automatic raising device that can be attached’to a production tamper.
The present power jack tamper cost $18,000 five years ago and has an estimated
life of 12 years. A year from now the machine will require a major overhaul
estimated to cost $5,000. It can be disposed of now via an outright cash sale
for $3,500. There will be no value at the end of 12 years.
The automatic raising attachment has a delivered selling price of $72,000
and an estimated life of 12 years. Because of anticipated future developments in
combined maintenance machines, it is felt that the machine should be disposed
of at the end of the seventh year to take advantage of newly developed
machines. Estimated sales value at the end of seven years is $5,000.
Tests have shown that the automatic raising machine will produce a more
uniform surface on the track than the power jack tamper now in use. The new
equipment will eliminate one labourer whose annual compensation, including
fringe benefits, is $30,000.
Track maintenance work is seasonal, and the equipment normally works
from May | to October 31 each year. Machine operators and labourers are transferred
to other work after October 31, at the same rate of pay.
The salesperson claims that the annual normal maintenance of the new
machine will run about $1,000 per year. Because the automatic raising machine
is more complicated than the manually operated machine, it is felt that it will
require a thorough overhaul at the end of the fourth year at an estimated cost of
$7,000.
Records show the annual normal maintenance of the Montreal machine to
be $1,200. Fuel consumption of the two machines is equal. Should CN keep or
replace the Montreal Power Jack Tamper? A 10 percent rate of return is desired.
Compute present values. Ignore income taxes.