Three years ago, Witt Gas Controls purchased equip­ment for $80,000 that was expected to have a useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing $30,000 one year ago. Technology changes now require that the equipment be upgraded again for another $25,000 so that it can be used for 3 more years. Its annual operat­ing cost will be $48,000 and it will have a $19,000 salvage value after 3 years. Alternatively, it can be replaced with new equipment that will cost $68,000 with operating costs of $35,000 per year and a sal­vage value of $21,000 after 3 years. If replaced now, the existing equipment will be sold for $12,000.

Question

(a) Calculate the annual worth of the defender at an interest rate of 10% per year.
(b) Determine the AW of the challenger over 3 years and select it or the defender.

Answer 1

(a) AWD = - (12,000 + 25,000)(A/P,10%,3) - 48,000 + 19,000(A/F,10%,3)
= -37,000(0.40211) - 48,000 + 19,000(0.30211)
= $-57,138

(b) AWC = -68,000(A/P,10%,3) - 35,000 + 21,000(A/F,10%,3)
= -68,000(0.40211) - 35,000 + 21,000(0.30211)
= $-55,999

Select the challenger now