The estimated future market values and M&O costs for an in-place backup generator at MediCare Hospital and a possible replacement are shown below. Mrs. Jamison, Hospital Director, told you that she is interested only in what happens over the next 3 years. If the current generator is to be replaced, it must be done now or kept in-place for the 3 years. Using an interest rate of 10% per year and a 3-year study period, determine whether or not the replacement is economically advantageous now.
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Compare cost of replacement (challenger) with cost of keeping defender (in-place) for 3 more years
AWC = -80,000(A/P,10%,3) – 37,000 + 20,000(A/F,10%,3)
= -80,000(0.40211) – 37,000 + 20,000(0.30211)
= $-63,127
AWD = -40,000(A/P,10%,3) – 55,000 + 11,000(A/F,10%,3)
= -40,000(0.40211) – 55,000 + 11,000(0.30211)
= $-67,761
Replace in-place with challenger now, since AWC < AWD
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