Question 2 25 points A 2year old asset is being considered f

Question #2 (25 points) A 2-year old asset is being considered for replacement. Its current market value is $13,000. The estimated market values during the next 3 years are given in the following table (the asset has a useful life of 5 years, but a similar asset is needed indefinitely. The effective MARR is 10% per year, a) What is the economic life of the asset? (20 points) b) What should be done if the AW of the best alternative is $6,200? (5 points) EOY Market Value Annual Expenses $9,000 $8,000 6,000 $2,500 $2,700 $3,000

Solution

a. Annual worth(AW) of the asset in Ist year= $9000 * (A/F, 10%,1)- $2500 =9000*1.00-2500= $6500

AW of the asset in 2nd year = $8000*(A/F,10%,2)-2700= 8000*.4762-2700=$1109.6

AW of the asset in 3rd year = $6000*(A/F,10%,3)-3000 = 6000*.3021-3000=--$1187.4

Here AW of the asset in the first year is highest.and the asset is 2 years old.

Therefore, the economic life of the asset is 2+1=3 years.

b. AW of the best alternative is $6200

Also market value of the 2 years old asset = $13000

Therefore, market value of the asset before 2 years or initial asset value = $13000*(F/A, 10%,2) = 13000*2.100= $27300

Useful life of the asset = 5 years

therefore, annual worth of the asset = $27300(A/P, 10%,5) = $27300*.2638 =$7201.74

Therefore, the asset should not be replaced before 5 years.