Question
A certain company is considering replacing one of its cranes with a newer model. The current crane in question is now worth $110,000 (future market
A certain company is considering replacing one of its cranes with a newer model. The current crane in question is now worth $110,000 (future market values are forecasted to drop by 25% per year). If kept, this machine, the Model 1, will require an immediate overhaul that would cost $40,000, and the operation cost is $60,000 for the first year and will increase by 35% afterwards.
The new crane (Model 2) has an 8-years service life, costs $400,000 with O & M costs of $50,000 for the 1st year and will increase by 35% for subsequent years. The model 1s market value will drop by 30% per year through its service life.
Knowing that the companys MARR is 12%
A] Plot total AE cost vs useful life for model 1 & the model 2 for 6 years.
B] Find the economic lives of the defender & the challenger.
C] Determine if and when the defender should be replaced.
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