Question 10.6: Suppose that in Example 10.5 the company executives feel the......

Schaum’s Outline of Engineering Economics [1215911]

Suppose that in Example 10.5 the company executives feel they cannot accurately forecast annual costs beyond five years into the future.

Step-by-Step

The 'Blue Check Mark' means that this solution was answered by an expert.
Learn more on how do we answer questions.

All other data remain the same. Using a five-year study period, we obtain for the current machine:

EUAC $_1$ (5) = ($6334.99)(A/P, 15%, 5) = $1889.85

and for the improved machine:

EUAC $_2$ (5) = ($7000 – $500) (A/p, 15%, 5) + (0.15) ($500) + $375 = $2389.08

The numbers are different, but the decision is the same as before: it is cheaper to keep the current machine. The difference between the alternatives in the 5-year study is $2389.08 – $1889.85 = $499.23, which is slightly larger than the $482.88 difference found in the 10-year study of Example 10.5. In this case, using the shorter study period did not reduce the amount of discrimination between the alternatives.

Related Answered Questions

Question: 10.4

Compute the CUV for keeping the old pump of Example 10.3 another four years, as against buying the new pump and keeping it seven years. ...

Verified Answer:

Substituting the numerical values from Example 10....

Question: 10.P.8

To keep an existing machine going for a number of years, an extensive (and expensive: $4000) overhaul is needed. Maintenance is expected to be $2000 annually for the next 2 years and to increase by $1000 per year after that. The machine has no present or future salvage value. An alternative machine ...

Verified Answer:

For the defender, writing the first year's mainten...

Question: 10.P.6

XYZ Company is considering replacing a machine. The new improved machine will cost $16000 installed; it will have an estimated service life of 8 years and $3000 salvage value. It is estimated that operating expenses will average $1000 a year. The present machine was purchased for $20 000 four years ...

Verified Answer:

Compare present-worth costs over the next 8 years....

Question: 10.P.2

A machine can be sold now for $15 000; if kept for another year, its salvage value will decline to $13 000. The operating expenses for this year are expected to be $30 000. A new machine is available for $50 000, with expected operating expenses of $18 000 for the first year, increasing by $1000 a ...

Verified Answer:

By (10.1), (CUV - SV

_1

) (AIP, i%, n...

Question: 10.P.1

Mr. Jones bought a new car in September 1981 for $7800. He paid $2400 down, and financed the balance with a loan at 18% nominal interest to be repaid in 35 monthly installments of $199.42 each. It is understood that if Mr. Jones fails to make a payment, the car will be repossessed by the loan ...

Verified Answer:

This is a clear and very common instance of a sunk...

Question: 10.1

A machine has an initial cost of $10 000. Being a special-purpose custom-built unit, it can only be resold as scrap at $500, no matter what its age. The machine has a 10-year service life. The annual operating costs are $2000 for each of the first two years, with an increase of $600 per year ...

Verified Answer:

The cost curve for this type of problem is the net...

Question: 10.3

The XYZ Company owns a Cyear-old pump that originally cost $3000. For the past four years the operating and maintenance costs of this pump have been: ...

Verified Answer:

In computing the EUAC curve of the old pump, the s...

Question: 10.P.10

A company decides to automate a process by installing a machine that costs $8000 and is expected to save $2500 per year. Discuss the wisdom of this decision, if the economic life of the machine is 10 years, at which time it has a $2000 salvage value, and if the MARR is 15%. ...

Verified Answer:

The present worth of the decision is (costs counte...

Question: 10.P.9

It is necessary to pump twice as much water as can be handled by the existing small pump, which is now 5 years old. This pump can be sold now for $1200 or kept for 5 years, after which it will have zero salvage value. Operating expenses are $3000 per year. If the pump is kept, a similar one must be ...

Verified Answer:

There are 3 possible alternatives: (1) to replace ...

Question: 10.P.7

Consider the replacement situation indicated in Table 10-6. If estimates beyond 8 years are unreliable and if the MARR is 15%, decide whether it is expedient to replace the current equipment. ...

Verified Answer:

The study period is limited by the current equipme...