Halcrow, Inc. expects to replace a downtime tracking system currently installed on CNC machines. The challenger system has a first cost of $70,000, an estimated AOC of $20,000 the first year increasing by 20% per year thereafter, a maximum useful life of 10 years, and a $10,000 market value after 1 year deceasing by 10% per year thereafter. (a) At an interest rate of 8% per year, using a spreadsheet, determine the ESL and corresponding AW value for the challenger. (b) What happens to the ESL and the shape of the total AW curve if the company is able to reduce the annual AOC percentage increase to 10%?
What will be an ideal response?
(a) ESL is n = 5 years with an AW = $-45,363 per year
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(b) ESL is now n = 7 years and the total AW curve is very flat between about n = 6 to 8, making the ESL less sensitive to changes in estimates.
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