Question 2 Replacement Decisions 18 marks A local greenhouse

Question 2: Replacement Decisions (18 marks) A local greenhouse is planning to buy a new solar-powered forklift this year to replace their old one that runs on propane. The purchase price of the new forklift would cost $30,000. Based on your previous experience with forklifts you estimate the operating and maintenance (O&M;) costs shown in the table below. You can use a declining balance depreciation model to calculate salvage values with a depreciation rate of 40%. The company uses a MARR of 10% for all financial analysis. Strongly encourage you to use a spreadsheet to validate your answers for this question, but DO NOT submit a spreadsheet or a table of numbers as your answer Show us all your calculations, for all years, to fully justify your answers. Year End O&M; 1 $3 000 APSC221-Summer 2018: Assignment 2 Page 2 of 3 $4 000 $5 620 $9 000 13 000 4 a) What is the Economic Life of the Challenger? And what is its minimum Equivalent Annual Cost (EAC)? (16 marks) b) If the Defender\'s Economic Life is 2 years, with a minimum EAC $14,000, when should they replace the old forklift? (1 mark) c) If the Defender\'s Economic Life is 2 years, with a minimum EAC $12,000 and its EAC in year 3 $14,100, when we should replace the old forklift? (1 mark)

Solution

Amount = Principal( 1+ rate/12)^(12*n)

a) P =$1

Amount = 1( 1+ 0.06/12)^(12*40)

= $10.957

b) P = $600

Amount = 600*( 1+ 0.06/12)^(12*40)

= $600*10.957 = $ 6574.47

c) P = $5000

Amount = 5000*( 1+ 0.06/12)^(12*40)

= 5000*10.957 = $54785

d) Part given the effective annual yield of the retirmenet account, the amounts in opart b and c

would be value in part (a) x amount invested.