Exam
Name___________________________________
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
Answer the question.
1)
Razorback Corp. is evaluating whether it should keep its automatic guided vehicle or sell it
immediately and purchase a new one. The current vehicle can be sold for $28,000 now;
however, with an overhaul of $8250, the current vehicle can last another 5 years. Other
relevant costs are shown below. Use a before–tax MARR of 5% per year and determine
whether the current vehicle should be replaced.
Defender Challenger
Capital investment, $ 34,250, 5 years ago 38,250
Annual operating expenses, $ 5500 7800
Useful life, years 10 12
Estimated salvage value at the end
of useful life 2500 5500
1)
Answer:
EUACD (5%) =$13,421.25
EUACC (5%) =$11,769.20
The EUAC of the challenger is less than the EUAC of the defender; the current
equipment should be replaced immediately.
Explanation:
Defender:
EUACD (5%) = (28,000 +8250)(A/P, 5%, 5) +5500 –2500 (A/F, 5%,5)
=36,250 (0.2310) +5500 –2500 (0.1810)
=13,421.25
Challenger:
EUACC (5%) =38,250 (A/P, 5%, 12) +7800 –5500 (A/F, 5%, 12)
=38,250 (0.1128) +7800 –5500( 0.0628)
=11,769.20
The EUAC of the challenger is less than the EUAC of the defender; the current
equipment should be replaced immediately.
2)
Aztec, a manufacturer of hard board and fiber cement sidings and panels, purchased
equipment for its new product line 9 years ago at a cost of $43,000. The asset has a market
value of $17,700, if it were sold now. The current asset is expected to provide adequate
services for another 3 years, given that the annual maintenance costs of $7250 is provided.
It is estimated that, if the current asset is continued in service, its final market value will be
$9600 three years from now. However, due to changing customer needs, a new piece of
machinery is being considered for the product line. The company can purchase the new
equipment at a cost of $51,000 and a $540 salvage value at the end of 15–year economic life.
The new equipment has annual maintenance costs of $5250. The SL method with a
15–years life and zero market value is used to write off both assets. Determine whether
replacement now is economical based on an after–tax annual worth analysis with an
effective tax rate of 38% and an after–tax MARR of 2% per year.
2)
1
Answer:
AWD(2%) = –$6465.04
AWC(2%) = –$5911.45
AWD(2%) <AWC(2%); therefore, the new equipment should be selected.
Explanation:
Defender:
d =$43,000
15 =$2866.67
BVNOW=$43,000 –$25,800.00 =$17,200.00
Gain on disposal (if sold now) =$17,700 –$17,200.00 = $500
BV12 =$43,000 –$34,400.00 =$8600.00
Gain on disposal (if sold in three years) =$9600 –$8600.00 =$1000
EOY BTCF Depr. TI Income
Taxes ATCF
0–$17,700 –$500 $190.00 –$17,510.00
1–3–$7250 $2866.67 –$10,116.67 $3844.33 –$3405.67
3b $9600 $1000 –$380.00 $9220.00
AWD(2%) = –$17,510.00 (A/P, 2%,3) – $3405.67+$9220.00 (A/F, 2%,3)
= –$17,510.00 (0.3468) – $3405.67+$9220.00 (0.3268)
= –$6465.04
Challenger:
d =$51,000
15 =$3400.00
EOY BTCF Depr. TI Income
Taxes ATCF
0–$51,000 – – – –$51,000
1–15 –$5250 $3400.00 –$8650.00 $3287.00 –$1963.00
15 $540 –$540 –$205.20 $334.80
AWC(2%) = –$51,000 (A/P, 2%, 15) – $1963.00+$334.80 (A/F, 10%,15)
= –$51,000 (0.0778) – $1963.00+$334.80 (0.0578)
= –$5911.45
AWD(2%) <AWC(2%); therefore, the new equipment should be selected.
2
3)
Yellowjacket, Inc., a large textile company, is trying to decide how long it should retain one
of its machines used in the sludge dewatering processes. The machine currently is
estimated to have a $35,000 market value and a future market value of $18,000 next year,
decreasing $1700 per year over its remaining maximum useful life of 8 years. The
operating cost is expected to be $5500 next year, increasing by $450 each year thereafter. If
the company’s MARR is 15% per year, what is the economic service life of this asset?
3)
Answer:
EUAC1=$27,750.00
EUAC2=$19,656.67
EUAC3=$17,033.40
EUAC4=$15,773.47
EUAC5=$15,054.80
EUAC6=$14,605.84
EUAC7=$14,311.29
EUAC8=$14,108.40
The economic service life with the minimum EUAC should be selected.
Explanation:
EUAC1=35,000 (A/P, 15%, 1) +5500 –18,000 (A/F,15%,1)
=35,000 (1.1500)+5500 –18,000 (1.0000)
=27,750.00
EUAC2=35,000 (A/P, 15%, 2) +5500 +450 (A/G, 15%, 2) –16,300 (A/F,15%,2)
=35,000 (0.6151) +5500 +450 (0.4651) –16,300 (0.4651)
=19,656.67
EUAC3=17,033.40
EUAC4=15,773.47
EUAC5=15,054.80
EUAC6=14,605.84
EUAC7=14,311.29
EUAC8=14,108.40
The economic service life with the minimum EUAC should be selected.
3
4)
A bin activator has an initial cost of $34,000 and a salvage value described by
S =34,000 –3300k, where k is the number of years since the bin activator was purchased.
The net annual revenue is estimated by R = 5000 +600k. The equipment will have a
maximum useful life of 5 years. If the company’s MARR is 4% per year, when is the best
time to abandon the equipment?
4)
Answer:
EUAC is minimized at the end of year 5 of $3594.10. Therefore, the bin activator
should be kept for 5 years before it should be abandoned.
Explanation:
EUAC1=34,000 (A/P, 4%, 1) –5600 –600 (A/G, 4%, 1) – (30,700)(A/F, 4%, 1)
=34,000 (1.0400) –5600 –600(0) – (30,700)(1.0000)
= –940.00
EUAC2=34,000 (A/P, 4%, 2) –5600 –600 (A/G, 4%, 2) – (27,400)(A/F, 4%, 2)
=34,000 (0.5302) –5600 –600(0.4902) – (27,400)(0.4902)
= –1298.80
EUAC3= –1653.37
EUAC4= –2002.00
EUAC5= –2347.06
EUAC is minimized at the end of year 5. Therefore, the bin activator should be
kept for 5 years before it should be abandoned.
5)
Lumberjack Power, operator of a nuclear power plant, is planning to replace its current
equipment with some that is more environmentally friendly. The old equipment has
annual operating expenses of $6750 and can be kept for 8 more years. The equipment will
have a salvage value of $4000, if sold 8 years from now, and has a current market value of
$24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has
estimated annual operating expenses of $6250 each year. The estimated market value of
the new equipment is $19,000 after 8 years of operation. If the company’s MARR is 16%
per year, should the equipment be replaced? Use a study period of 8 years and the present
worth method.
5)
Answer:
PWD(16%) = –$52,099.30
PWC(16%) = –$83,352.50
The PW of the defender is greater than the PW of the challenger; the current
equipment should be retained for now.
Explanation:
Defender:
PWD(16%) = –24,000 –6750 (P/A, 16%, 8)+4000 (P/F, 16%, 8)
= –24,000 –6750 (4.3436) +4000 (0.3050)
= –52,099.30
Challenger:
PWC(16%) = –62,000 –6250 (P/A, 16%, 8) +19,000 (P/A, 16%, 8)
= –62,000 –6250 (4.3436) +19,000 (0.3050)
= –83,352.50
The PW of the defender is greater than the PW of the challenger; the current
equipment should be retained for now.
4
6)
A challenger asset with a maximum useful life of 6 years has a first cost of $43,000 and an
estimated annual operating cost of $6250. The market value is expected to decrease by
$6450 each year for the next 6 years. If the MARR is 10% per year, what is the economic
service life of this asset?
6)
Answer:
The economic service life is 6 years with EUAC =$15,565.52
Explanation:
EUAC1=43,000 (A/P, 10%, 1) +6250 –36,550 (A/F,10%,1)
=43,000 (1.1000) +6250 –36,550( 1.0000)
=17,000.00
EUAC2=43,000 (A/P, 10%, 2) +6250 –30,100 (A/F,10%,2)
=43,000 (0.5762)+6250 –30,100 (0.4762)
=16,692.98
EUAC3=16,395.64
EUAC4=16,109.90
EUAC5=15,832.55
EUAC6=15,565.52
The economic service life is 6 years.
7)
Three years ago, a company purchased a system of modular office furniture at a cost of
$29,000. Straight–line depreciation with no salvage value and a 5–year recovery period
was used to write off the capital investment. A market value of $12,600 is expected if the
system is sold now. If the system is kept, the company expects annual maintenance costs
of $5500 each year and zero market value at the end of useful life. If the company decides
to buy a new system, the new system will cost $32,000 and have a zero market value at the
end of the estimated life of 5 years. The company expects annual maintenance costs of
$8500 each year. Assume an effective tax rate of 39% and an after–tax MARR of 7% per
year. Determine whether the replacement now is economical.
7)
Answer:
AWD(7%) = –$7846.35
AWC(7%) = –$10,493.80
AWD(7%) >AWC(7%); therefore, the current system should be retained.
5
Explanation:
Defender:
dk=$29,000
5=$5800.00
BVNOW=$29,000 –$17,400.00 =$11,600.00,
MVNOW –BVNOW =$12,600 –$11,600.00
=$1000.00 if sold
BV5= $0
EOY BTCF Depr. TI Income Taxes ATCF
0–$12,600 – –$1000.00 $390.00 –$12,210.00
1–2a –$5500 $5800.00 –$11,300.00 $4407.00 –$1093.00
2b $0 –$0 $0 $0
AWD(7%) = –$12,210.00 (A/P, 7%,2) – 1093.00
= –$12,210.00 (0.5531) – 1093.00
= –$7846.35
Challenger:
dk=$32,000
5=$6400.00
EOY BTCF Depr. TI Income Taxes ATCF
0–$32,000 – – – –$32,000
1–5a –$8500 $6400.00 –$14,900.00 $5811.00 –$2689.00
5b $0 –$0 $0 0$
AWC(7%) = –$32,000 (A/P, 7%, 5) – $2689.00
= –$32,000 (0.2439) – $2689.00
= –$10,493.80
AWD(7%) >AWC(7%); therefore, the current system should be retained.
6
8)
Bruin Manufacturing is evaluating whether it should retain its current environmental test
chamber and room or sell it immediately and purchase a new one. The relevant costs are
shown below. The current one can be kept for another 5 years, given that an additional
maintenance cost of $500 each year is provided each year. Determine whether the current
equipment should be replaced. Use a before–tax MARR of 13% per year and the annual
cost method.
Defender Challenger
Capital investment, $ 3 years ago 33,000 –
Capital investment, $ –38,000
Annual operating expenses, $ 5250 5450
Annual maintenance, $ 500 –
Current market value 13,000 –
Estimated salvage value at the end
of 5 additional years 1500 23,000
8)
Answer:
EUACD (13%) =$9214.45
EUACC (13%) =$12,704.50
The EUAC of the defender is less than the EUAC of the challenger; the current
equipment should be retained for now.
Explanation:
The study period is 5 years.
Defender:
EUACD (13%) =13,000 (A/P, 13%, 5) +5250 +500– 1500 (A/F, 13%, 5)
=13,000 (0.2843) +5250 +500– 1500 (0.1543)
=9214.45
Challenger:
EUACC (13%) =38,000 (A/P, 13%,5) +5450 –23,000 (A/F, 13%,5)
=38,000 (0.2843) +5450 –23,000 (0.1543)
=12,704.50
The EUAC of the defender is less than the EUAC of the challenger; the current
equipment should be retained for now.
7
Answer Key
Testname: C9
1)
EUACD (5%) =$13,421.25
EUACC (5%) =$11,769.20
The EUAC of the challenger is less than the EUAC of the defender; the current equipment should be replaced
immediately.
2)
AWD(2%) = –$6465.04
AWC(2%) = –$5911.45
AWD(2%) <AWC(2%); therefore, the new equipment should be selected.
3)
EUAC1=$27,750.00
EUAC2=$19,656.67
EUAC3=$17,033.40
EUAC4=$15,773.47
EUAC5=$15,054.80
EUAC6=$14,605.84
EUAC7=$14,311.29
EUAC8=$14,108.40
The economic service life with the minimum EUAC should be selected.
4)
EUAC is minimized at the end of year 5 of $3594.10. Therefore, the bin activator should be kept for 5 years before it
should be abandoned.
5)
PWD(16%) = –$52,099.30
PWC(16%) = –$83,352.50
The PW of the defender is greater than the PW of the challenger; the current equipment should be retained for now.
6)
The economic service life is 6 years with EUAC =$15,565.52
7)
AWD(7%) = –$7846.35
AWC(7%) = –$10,493.80
AWD(7%) >AWC(7%); therefore, the current system should be retained.
8)
EUACD (13%) =$9214.45
EUACC (13%) =$12,704.50
The EUAC of the defender is less than the EUAC of the challenger; the current equipment should be retained for
now.