First, develop the spreadsheet to confirm the re­placement study decision conducted for Randall- Rico Consultants in Problem 11.31. Then answer the questions below posed by Mr. Randall in a meeting when he was informed of the results of the replacement study.

Question

(a) I want to buy the new graphical plotter. What is the required purchase price of the new plotter to make me indifferent between buy­ing it and keeping the old one?

(b) How much of a trade-in do I have to get for the old plotter to make me indifferent be­tween retaining it (with the current ESL) and buying the new one? Is this the economically correct decision?

Problem 11.31



Randall-Rico Consultants, 5 years ago, pur­chased for $45,000 a microwave signal graphi­cal plotter for corrosion detection in concrete structures. It is expected to have the market val­ues and annual operating costs shown for its re­maining useful life of up to 3 years. It could be traded now at an appraised market value of $8000.



A replacement plotter with new Internet-based, digital technology costs $125,000, has an esti­mated salvage value of 8% of the purchase price after its 5-year life, and an AOC of 20% of its pur­chase price. At an interest rate of 15% per year, determine how many more years Randall-Rico should retain the present plotter.

Answer 1

Spreadsheet verification below: ESL for defender is n = 1; select defender over challenger with

AWC = $-60,806



(a) Write the challenger PMT function in cell-reference format in cell F11



= - PMT($B$1,5,$B$11,-$B$11*0.08) + $B$11*0.2



Use Goal Seek to display the required first cost of

PC = $-109,364



(b) Use Goal seek to force AWD,1 = $-60,806 (cell F5). Required trade-in/market value is

now $14,614.





Correct economic decision? No, because the new trade-in value increases the ESL to

n = 2 with AWD,2 = $-58,524, which is lower that AWC $-60,806. Analysis is below.