Defender: A 5 year-old tooling kit that was purchased new for $50,000 and has a current market (trade-in) value of $8000 and expected O&M costs of $8600, increasing by 1000 per year. The kit is in need of an immediate overhaul (repair) expected to cost $1000. Future market values are expected to decline by 25% annually (going forward). The kit can be used for another 7 years at most. The optimal replacement kit information is below. The new model kit will be needed indefinitely. Assume a unique minimum AECN(15%) for both kits (both the current and replacement kit). The replacement kit has N*=4 and AEC*C = 14,000

1) Find AEC*D.

a) 12,458 - 12,498

b) 12,498 - 12,538

c) 12,538 - 12,578

d) 12,578 - 12,618

e) None of the above

2) Now consider the error of keeping the defender one year longer than is cost efficient. How much more does that error cost you in present value? Hint: the first step in this multi-step problem involves using marginal analysis to identify the optimal plan. Hint #2: Next carefully sketch the cash flow diagram of the optimal plan and also the plan where you keep the defender one year longer. Then find the present value of the difference.

a) 120 - 130

b) 130 - 140

c) 140 - 150

d) 150 - 160

e) None of the above