The in-place kiln and replacement kiln (GH) were evaluated using a fixed study pe­riod of 6 years. This is a significantly shortened period compared to the expected 12-year life of the challenger. Use the best estimates available throughout this case to determine the impact on the capital recovery amount for the replacement kiln (GH) of shortening the evaluation time from 12 to 6 years.

What will be an ideal response?


Use the market value estimates in Example 11.3 (Figure 11-3) to calculate CR for n = 6 and
n = 12 years for the challenger GH. In $ million units,

n = 6 years: CR = -38(A/P,15%,6) + 5.93(A/F,15%,6)
= -38(0.26424) + 5.93(0.11424)
= $-9.36 ($-9.36 million)

n = 12 years: CR = -38(A/P,15%,12) + 1.06(A/F,15%,12)
= -38(0.18448) + 1.06(0.03448)
= $-6.97 ($-6.97 million)

Required revenue to recover $38 million first cost plus 15% per year is reduced over 25% if the full 12?year life is considered rather than the abbreviated 6-year study period.

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