A municipality is considering replacing an existing piece of road maintenance equipment. The replacement being considered has the following characteristics: Purchase cost = $76,000 Installation cost = $4,000 Useful life = 10 years Salvage value = $20,000 (straight-line depreciation) O&M cost = $2,400 for the first year, increasing $600/year after that Interest rate = 5% Complete the missing values in the following table and determine the economic life of the replacement. Provide detailed hand calculations for Years Kept = 4. EAC Capital Years Kept O&M Costs EAC O&M EAC Total 0 1 2 3 . 5 6 7 Salvage Value $74,000.00 $66,625.00 $59,250.00 $51,875.00 $44,500.00 $37,125.00 $29,750.00 $22,375.00 $15,000.00 0 1 2 3 4 5 6 4 $2,600 $3,200 $3,800 $4,400 $5,000 $5,600 $12,187.07 $2,600.00 $14,787.07 $11,672.40 $2,892.68 $14,565.08 $11,297.34 $3,180.49 $14,477.84 $10,993.59 $3,463.43 $14,457.02 $10,731.85 $3,741.51 $14,473.36 $10,497.47 $4,014.74 $14,512.22 00 Nm Years Salvage O&M EAC Kept Value Costs Capital EAC O&M EAC Total 0 $76,000.00 1 $2,400.00 $13,600.00 $2,400.00 $16,000.00 2 $3,000.00 $11,414.63 $2,692.68 $14,107.32 3 $3,600.00 4 $4,200.00 5 $4,800.00 6 $5,400.00 7 $6,000.00 $9,305.82 $4,083.14 $13,388.95 8 $6,600.00 $9,110.42 $4,346.71 $13,457.13 9 $7,200.00 $8,933.54 $4,605.47 $13,539.01 10 $20,000.00 $7,800.00 $8,770.27 $4,859.45 $13,629.73 4 Following along from Question 2, the existing piece of equipment has been analyzed. The results are shown on the next slide. The existing equipment has a useful life of 8-years, but is already 2 years old. a) What is the existing equipment's Economic Life? b) What should your decision be? Keep the defender, or replace with the challenger? Describe 2 ways you can make that determination. A municipality is considering replacing an existing piece of road maintenance equipment. The replacement being considered has the following characteristics: Purchase cost = $76,000 Installation cost = $4,000 Useful life = 10 years Salvage value = $20,000 (straight-line depreciation) O&M cost = $2,400 for the first year, increasing $600/year after that Interest rate = 5% Complete the missing values in the following table and determine the economic life of the replacement. Provide detailed hand calculations for Years Kept = 4. EAC Capital Years Kept O&M Costs EAC O&M EAC Total 0 1 2 3 . 5 6 7 Salvage Value $74,000.00 $66,625.00 $59,250.00 $51,875.00 $44,500.00 $37,125.00 $29,750.00 $22,375.00 $15,000.00 0 1 2 3 4 5 6 4 $2,600 $3,200 $3,800 $4,400 $5,000 $5,600 $12,187.07 $2,600.00 $14,787.07 $11,672.40 $2,892.68 $14,565.08 $11,297.34 $3,180.49 $14,477.84 $10,993.59 $3,463.43 $14,457.02 $10,731.85 $3,741.51 $14,473.36 $10,497.47 $4,014.74 $14,512.22 00 Nm Years Salvage O&M EAC Kept Value Costs Capital EAC O&M EAC Total 0 $76,000.00 1 $2,400.00 $13,600.00 $2,400.00 $16,000.00 2 $3,000.00 $11,414.63 $2,692.68 $14,107.32 3 $3,600.00 4 $4,200.00 5 $4,800.00 6 $5,400.00 7 $6,000.00 $9,305.82 $4,083.14 $13,388.95 8 $6,600.00 $9,110.42 $4,346.71 $13,457.13 9 $7,200.00 $8,933.54 $4,605.47 $13,539.01 10 $20,000.00 $7,800.00 $8,770.27 $4,859.45 $13,629.73 4 Following along from Question 2, the existing piece of equipment has been analyzed. The results are shown on the next slide. The existing equipment has a useful life of 8-years, but is already 2 years old. a) What is the existing equipment's Economic Life? b) What should your decision be? Keep the defender, or replace with the challenger? Describe 2 ways you can make that determination
