A decision by the supervising engineer must be made whether to replace a certain engine with a new one or to rebore the cylinders of the old engine and thoroughly recondition it. The original cost of the engine 10 yrs ago was P 70,000 to rebore and recondition it now will cost P 28,000 but would extend its useful life for 5 yrs. A new engine will have a first cost of P 62,000 and will have an estimated life of 10 yrs. It is expected that the annual costs of fuel and lubricants with the reconditioned engine will be about P 20,000 and that this cost will be 15% less with the new engine. It is also believed that repairs will be P 2,500 a year less with the new engine than with the reconditioned one. If money is worth 10%, what would you recommend? Use annual cost method.

A decision by the supervising engineer must be made whether to replace a certain engine with a new one or to rebore the cylinders of the old engine and thoroughly recondition it. The original cost of the engine 10 yrs ago was P 70,000 to rebore and recondition it now will cost P 28,000 but would extend its useful life for 5 yrs. A new engine will have a first cost of P 62,000 and will have an estimated life of 10 yrs. It is expected that the annual costs of fuel and lubricants with the reconditioned engine will be about P 20,000 and that this cost will be 15% less with the new engine. It is also believed that repairs will be P 2,500 a year less with the new engine than with the reconditioned one. If money is worth 10%, what would you recommend? Use annual cost method.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 17P

See similar textbooks

Similar questions

Two different mutually exclusive alternatives can be used for producing a certain machine part. Alternative A will have a first cost of $60,000 with a $15,000 salvage value after its 3 year life. The operating cost with this method will be $35,000 per year. Alternative B will cost $45,000, but it will last only 2 years. Its salvage value is $10,000 with an operating cost of $25,000 per year. Using an MARR value of 12% per year, which method should be selected?
Two different types of hydraulic equipment are being considered for a certain power plant. Machine A has a first cost of P15,000, and a salvage value of P1,500, life is 6 years and has an annual maintenance an operating cost of P900. Machine B has a first cost of P18,000, life of 8 years with no salvage value. Annual operating cost is P750. Which machine would be used to justify the purchase of such machine if money is worth 7% and compute the difference between its equivalent present worth? Show solutions.
An industrial plant has an engine costing of P 7,200 which is 5 years old. Its working life if 15 years and salvage value if P 500. The average operating cost per year thus far has been P 4,200. A new engine costing P 12,000 estimated life 15 years and salvage value of P 800 is guaranteed to have an operating cost of P 3,500 per year. The new engine is considered as a replacement of the old. Will the replacement be justified if P 4,500 can be obtained by the sale of the old engine? Use straight line depreciation with 6% interest rate
You are evaluating two different silicon wafer milling machines. The Techron I costs $300,000, has a 3-year life, and has pretax operating costs of $83,000 per year. The Techron II costs $520,000, has a 5-year life, and has pretax operating costs of $49,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $60,000. If your tax rate is 24 percent and your discount rate is 12 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
You are evaluating two different silicon wafer milling machines. The Techron I costs $303,000, has a 3-year life, and has pretax operating costs of $84,000 per year. The Techron Il costs $525,000, has a 5-year life, and has pretax operating costs of $57,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $61,000. If your tax rate is 25 percent and your discount rate is 13 percent, compute the EAC for both machines. (A negative answer should be Indicated by a minus sign. Do not round Intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Techron I Techron II Which machine do you prefer? Techron I Techron II
You are evaluating two different silicon wafer milling machines. The Techron I costs $249,000, has a 3-year life, and has pretax operating costs of $66,000 per year. The Techron II costs $435,000, has a 5-year life, and has pretax operating costs of $39,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $43,000. If your tax rate is 22 percent and your discount rate is 11 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Techron I Techron II Which machine do you prefer? O Techron II O Techron I
You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $41,000 per year. The Techron II costs $330,000, has a 5-year life, and has pretax operating costs of $52,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $25,000. If your tax rate is 21 percent and your discount rate is 9 percent, compute the EAC for both machines.
Airodyne Wind, Inc., has wind tunnels that can operate vertically or horizontally for evaluating the effects of air flow on a component's PCB response and reliability. The company expects to build a new tunnel that will be outfitted with multiple sensor ports. For the estimates below, calculate the equivalent annual cost of the project. First Cost Replacement Cost, Year 2 AOC per Year Salvage Value Life, Years Interest Rate The equivalent annual cost of the project is $ $-570,000 $-300,000 $-870,000 $270,000 7 13%
Two methods can be used to produce expansion anchors. Method A costs $ 70, 000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $36,000 in year 1, increasing by $3200 each year. Method B will have a first cost of $ 116,000, an operating cost of $10000 in year 1, increasing by $10000 each year, and a $46, 000 salvage value after its 3 year life. At an interest rate of 8% per year, which method should be used on the basis of a present worth analysis?
Yüksel Composit is considering to purchase one of two autoclave machine alternatives. Machine 1 has a first cost of $ 15,339, an operating cost of $268 per quarter, and a salvage value of $2,463 after its 2-year life. Machine 2 has a first cost of $32,971, an operating cost of $470 per quarter, and a salvage value of $10,897 after its 4-year life. Conduct a present worth analysis at an interest rate of 12% per year, compounded quarterly. Which machine is selected and what is the present worth of the selected machine? Select one: a. Machine 1 is selected and present worth is $-29,710 b. Machine 1 is selected and present worth is $-29,214 c. Machine 1 is selected and present worth is $-27,335 d. Machine 2 is selected and present worth is $-25,539 e. Machine 2 is selected and present worth is $-20,566 f. Machine 2 is selected and present worth is $- 32,360
Two machines are being taken into consideration for the manufacturing of a selected component for which there's a protracted term-demand. Machine A value P50,000.00 and is anticipated to final three years and feature a P10,000 salvage value. Machine B expenses P75,000.00 and is anticipated to final 6 years and feature 0 salvage value. Machine A can produce a component in 18 seconds; Machine B calls for simplest 12 seconds in step with component. The out-of-pocket hourly value of operation is P38.00 for A and P30.00 for B. Monthly Maintenance value are P200.00 for A and P220.00 for B. If interest invested is 15%, decide the range of components in step with yr. at which the machines are similarly economical. If the anticipated range of components in parts per year is extra than this break-even quantity, which gadget might be favored?
A proposal to buy a new machine to manufacture a new product submitted by the Production Department follows: The new machine cost P1,800,000 with an estimated life of five years and with a salvage value of P500,000 will be depreciated using the Sum of Year's Digit method (SYD). Freight and installation costs are estimated to be P350,000. This machine can be sold for P400,000 after its estimated life. With this machine, P1,250,000 sales will be generated and P550,000 cash expenses will be incurred every year. The expected rate of return of this project is 11% and corporate tax is 25%. Compute the following: A. Net Cash Outlay (Net Investment Cost) B. Net Cash Inflows (Cash Returns) With solution