The AW of the current process to make motion controllers is $–62,000 per year. A replacement process under consideration has estimates of P = $64,000, AOC = $38,000, and n = 3 years. Three engineers have given their opinions about what the salvage value of the new process may be in 3 years as $10,000, $14,500, and $18,000. (a) Is the deci­sion to replace the process sensitive to the salvage value estimates at a MARR of 15% per year? (b) If sensitive, what is the lowest salvage value that jus­tifies the replacement process?

Question

What will be an ideal response?

Answer 1

(a) AWcurrent = $-62,000

AW10,000 = - 64,000(A/P,15%,3) – 38,000 + 10,000(A/F,15%,3)
= - 64,000(0.43798) – 38,000 + 10,000(0.28798)
= $-63,151 (> $-62,000)

AW14,500 = - 64,000(A/P,15%,3) – 38,000 + 14,500(A/F,15%,3)
= - 64,000(0.43798) – 38,000 + 14,500(0.28798)
= $-61,855 (< $-62,000)

AW18,000 = - 64,000(A/P,15%,3) – 38,000 + 18,000(A/F,15%,3)
= - 64,000(0.43798) – 38,000 + 18,000(0.28798)
= $-60,847 (< $-62,000)

The decision is sensitive

(b) Replace when AW < $-62,000 for an S between $10,000 and $14,500. Set up the spreadsheet and use Goal Seek to change the cell containing salvage estimates such that the function = - PMT(15%,3,-64000,salvage) - 38000 displays -62,000. Answer is $13,996.