Question

A joint former cost $ 60 000 to purchase and $ 100 000 to install seven years ago. The

market value now is $ 33 000, and this will decline by 12 percent of current value each year

for the next three years. Operating and maintenance costs are estimated to be $ 3 400 this

year, and are expected to increase by $ 500 per year.

(

a) How much should the EAC of a new joint former be over its economic life to justify

replacing the old one sometime in the next three years? The MARR is 10 percent.

(b) The EAC for a new joint former turns out to be $ 10 300 for a 10- year life. Should the old

joint former be replaced within the next three years? If so, when?

(c) Is it necessary to consider replacing the old joint former more than three years from now,

given that a new one has an EAC of $ 10 300?

Answer 1

Answer :

a) EAC(capital, 2 additional years)

= (P – S)(A/P, 10%, 2) + Si

= (33 000 – 25 555.20)(0.57619) + 25 555.20(0.1)

6845.00 EAC (operating, 2 additional years)

= [3400(F/P, 10%, 1) + 3900](A/F, 10%, 2)

= [3400(1.1) + 3900](0.47619)

3638

Calculation Summary are as follows:

Year	Salvage value	Maintenance cost	Capital EAC	Operating EAC	Total EAC
0	33,000
1	29,040	3,400	7,260	3,400	10,660
2	25,555	3,900	6,845	3,638	10,483
3	22,488	4,400	6,476	3,868	10,344

The new joint former has to be less than $10,344 over its economic life to justify replacement.

b)  Yes, the old joint former should be replaced with the new one since the EAC for economic life of the new one is less than any of the EAC’s for the old one. you can replace it now.

c)  Beacause the EAC for the old asset seems to be decreasing. So there may be a period for which its EAC is less than of the challenger. It is necessary to check whether replacement should occur more than 3 years from now