The market value (salvage value) series of the proposed $38 million replace­ment kiln (GH) dropped to $25 million in only 1 year and then retained 75% of the previous year’s market value through the remainder of its 12-year expected life. Based on the experience with the cur­rent kiln, and the higher temperature capability of the replacement, the new kiln is actually expected to retain only 50% of the previous year’s value starting in year 5. Additionally, the heating element replacement in year 6 will probably cost $4 million, not $2 million. And finally, the maintenance costs will be considerably higher as the kiln ages. Start­ing in year 5, the AOC is expected to increase by 25% per year, not 10% as predicted earlier. The Manager of Critical Equipment is now very con­cerned

Question

that the ESL will be significantly decreased from the 12 years calculated earlier

(a) Determine the new ESL and associated AW value.
(b) In percentage changes, estimate how much these new cost estimates may affect the min­imum-cost life and AW of cost estimate.

Answer 1

(a) The three estimate changes are made in the spreadsheet: increase to $4 million for heating element exchange in year 5; market value retention of only 50% starting with year 5; and, increases of 25% per year in maintenance cost starting in year 5.

Results are significantly different. ESL is now 8 or 9 years, with a flat AW curve

for several years.





(b) ESL has decreased from 12 to 8 or 9 years (about a 25 to 33% decrease); AW of costs

has increased from $12.32 to $14.13 million per year, which is an annual increase of

14.7%.