Engineering Economy 255330

Assignment 9

Chapter 11 Replacement and retention decisions. Due Date: 11.7 A machine purchased 1 year ago for $85,000 costs more to operate than anticipated. When purchased, the machine was expected to be used for 10 years with annual maintenance costs of $22,000 and a $10,000 salvage value. However, last year, it cost the company $35,000 to maintain it, and these costs are expected to escalate to $36,500 this year and increase by $1,500 each year thereafter. The salvage value is now estimated to be $85,000-$10,000k, where k is the number of years since the machine was purchased. It is now estimated that this machine will be useful for a maximum of 5 more years. Determine the values of P, AOC, n, and S for a replacement study performed now.. (P= $75,000 , AOC= $36,500 + 1,500k (k=1 to 5) , n=5 years ,S= $25,000) 11.13 A piece of equipment has a first cost of $150,000, a maximum useful life of 7 years, and a salvage value described by S = 120,000 20,000k, where k is the number of years since it was purchased. The salvage value does not go below zero. The AOC series is estimated using AOC = 60,000 + 10,000k. The interest rate is 15% per year. Determine the economic service life (a) by hand solution, using regular AW computations, and (b) by computer, using annual marginal cost estimates. ( ESL = 3 years with AW3 = $-127,489) 11.22 Five years ago, the Nuyork Port Authority purchased several containerized transport vehicles for $350,000 each. Last year a replacement study was performed with the decision to retain the vehicles for 2 more years. However, this year the situation has changed in that each transport vehicle is estimate to have a value of only $8,000 now. If they are kept in service, upgrading at a cost of $50,000 will make them useful for up 2 more years. Operating cost is expected to be $10,000 the first year and $15,000 the second year, with no selvage value at all. Alternatively, the company can purchase a new vehicle with an ESL of 7 years, no salvage value, and an equivalent annual cost of $-55,540 per year. The MARR is 10% per year. If the budget to upgrade the current vehicles is available this year, use these estimates to determine (a) when the company should replace the upgraded vehicles and (b) the minimum future salvage value of a new vehicle necessary to indicate that purchasing now is economically advantageous to upgrading. ((a) The defender ESL is 2 years with AWD = $-45,800; therefore keep the current vehicles for 2 more years. (b) S = -9740/0.10541 = $92,401)

11.28

Three years ago. Mercy Hospital significantly improved its hyperbaric oxygen (HBO) therapy equipment for advanced treatment of problem wounds, chronic bone infections, and radiation injury. The equipment cost $275,000 then and can be used for up to 3 years more. If the HBO system is replaced now, the hospital can realize $20,000. If retained, the market values and operating costs tabulated are estimated. A new system, made of a composite material, is cheaper to purchase initially at $150,000 and cheaper to operate during its initial years. It has a maximum life of 6 years, but market values and AOC change significantly after 3 years of use due to the projected deterioration of the composite material used in construction. Additionally, a recurring cost of $40,000 per year to inspect and rework the composite material is anticipated after 4 years of used. Market values, operating cost, and material rework estimates are tabulated. On the basis of these estimates and i= 15% per year, what are the ESL and AW values for the defender and challenger, and in what year should the current HBO system be replaced? Work this problem by hand.(See Problems 11.29 and 11.31 for more questions using these estimates.) (Keep the defender 1 more year at AWD= $-63,000, then replace for 4 years at AWC=$-66,844)
year 1 2 3 4 5 6 Current HBO System market AOC, $ value, $ 10,000 -50,000 6,000 -60,000 2,000 -70,000 Proposed HBO System Market AOC, $ Material Value, $ Rework, $ 65,000 -10,000 45,000 -14,000 25,000 -18,000 5,000 -22,000 0 -26,000 -40,000 0 -30,000 -40,000

11.35 A machine that was purchased 3 years ago for $140,000 is now to slow to satisfy increased demand. The machine can be upgraded now for $70,000 or sold to a smaller company for $40,000. The current machine will have an annual operating cost of $85,000 per year. If upgraded, the presently owned machine will be kept in service for only 3 more years, then replaced with a machine that will be used in the manufacture of several other product lines. This replacement machine, which will serve the company now and for at least 8 years, will cost $220,000. Its salvage value will be $50,000 for years 1 through 5; $20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $65,000 per year. The company asks you to perform an economic analysis at 20% per year, using a 5-year time horizon. Should the company replace the presently owned machine now, or do it 3 years from now? What are the AW values? (Replacement the defender with the challenger now.)