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. (Problem 11.45 continues the analysis using a spreadsheet.)
Find ESL of the defender; compare with AWC over 5 years.
AWD,1 = -8000(A/P,15%,1) – 50,000 + 6000(A/F,15%,1)
= -8000(1.15) – 44,000
= $-53,200
AWD,2 = -8000(A/P,15%,2) – 50,000 + (-3000 + 4000)(A/F,15%,2)
= -8000 (0.61512) – 50,000 + 1000(0.46512)
= $-54,456
AWD,3 = -8000(A/P,15%,3) - ?50,000(P/F,15%,1) +
53,000(P/F,15%,2)?(A/P,15%,3) + (-60,000 +
1000)(A/F,15%,3)
= -8000 (0.43798) - ?50,000(0.8696) + 53,000(0.7561)?
(0.43798) -59,000(0.28798)
= -$57,089
The ESL is 1 year with AWD,1 = $-53,200
Challenger: Salvage value: 125,000(0.08) = $10,000
AOC per year: 125,000(0.20) = $25,000
AWC = -125,000(A/P,15%,5) – 25,000 + 10,000(A/F,15%,5)
= -125,000(0.29832) – 25,000 + 10,000(0.14832)
= $-60,807
Since the ESL AWD,1 value is lower than the challenger AWC, Randall-Rico
should keep the defender now and replace it after 3 years.
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