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.

Question

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.)

Answer 1

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.