Question

Over the next 3 years a road paving company is considering replacing their existing grading machine which was purchased 5 years ago for $950,000. Depreciation of the grading machine follows a straight line depreciation model with a predicted salvage value of $150,000 three years from now. The operation and maintenance costs of the grading machine have been increasing and are expected to be $20,000 next year, $30,000 two years from now and $50,000 three years from now. The company uses a MARR of 15%. a) What is the salvage value of the grading machine in years 0, 1, and 2? Calculate the EACTotal for years 1, 2, and 3. Show ALL your work for full marks. b) c) What is the EAC* and the Economic Life of the existing grading machine? d) The road paving company went out and obtained the details on a few other replacement options which are presented in the table below. Replacement Option EAC* Economic Life ($) (years) B 195,000 5 C 180,000 10 What is the best option in the table above? Should the existing grader be replaced and if so when?

Answer 1

Note : present value factors for 3 years @ 15% is -0.8695,0.7561,0.6575

a) Salvage value of the grading machine year 0,1,2,

Salvage value of the grading machine year 0,1,2 - 1/(1+r)ⁿ *salvage value after 3 years

^{r = mirr =15%}

^{=1/(1+0.15)3 *1,50,000=0.6575*1,50,000}

^=98,625

Salvage value of the grading machine year 1 =1/(1+015)²*150000

=1,13,422

Salvage value of the grading machine year 2 =1/(1+015)¹*150000

=1,30,435

b) EAC total & 1,2,3 years

EAC total & 1,2,3 years = 20,000*0.8695+30,000*0.7561+50,000*0.6575=72948=^72950

c)opening cost before 5 years =9,50,000

Less : depriciation for 2 years = 9,50,000/2*5= 3,80,000

WDV before 3 years = 5,70,000

d) Better option is B because its economic user life is less compare to another one .it will more depriciation for claiming tax benefits

Original pant must replace after 5 years with plant b ,it is advisable.