A special purpose pump is being considered in a chemical pla

A special purpose pump is being considered in a chemical plant. The existing machine will be kept at most 3 more years. The existing pump has annual operating costs of $20,000 and if sold now is worth $5,000, if sold after 1 year is worth $3,000, after 2 years $2,500, and after 3 years $2,000. A machine could be contracted out $21,750 per year any time in the next 3 years. What is the ESL for the defender, and when, if ever, should it be replaced? The company uses a MARR of 15%.

Any steps in finding the answer would be very helpful, thanks!

Engineering Economics

Solution

The ESL of defender is 3 years and its EUAC in 3rd year is 21614. Hence it should be replaced after 3 years because the challenger has an annual cost of 21750 which is greater than EUAC of defender

Assume the machines are kept for n years

EUAC (n = 1) = [5000 + 20000(P/A, 15%, 1) – 3000(P/F, 15%, 1)](A/P, 15%, 1)

= 22,750

EUAC (n = 2) = [5000 + 20000(P/A, 15%, 2) – 3000(P/F, 15%, 2)](A/P, 15%, 2)

= 21913

EUAC (n = 3) = [172000 + 74000(P/A, 10%, 3) – 70000(P/F, 10%, 3)](A/P, 10%, 3)

= 21614