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Rwplacement Analysis

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Engineer ing

INE 428

Lec 2

1

Time Value of Money Relation

(F / P,i,N) F = P (1+i)N

N

F?

P Given

2

Time Value of Money Relation

(P / F,i,N) Given

P = F / (1+i)N

N

F

P?

F 1 N

P = = F

(1+i)N 1+i

3

Time Value of Money Relation

(A / F,i,N) Given

A ? F

N

i

A= F

(1+i)N - 1

4

Time Value of Money Relation

(F / A,i,N)

A Given F?

N

(1+i)N - 1

F=A

i

5

Time Value of Money Relation

(P / A,i,N)

A Given

N

P? (1+i)N - 1

P=A

i (1+i)N

6

Time Value of Money Relation

(A / P,i,N)

A ??

N

PGiven (1+i) N

i

A= P

(1+i)N - 1

7

Time Value of Money Relation

G Given

(A / G,i,N) (N-1)G

3G

N 2G

0 G

A ??

(1+i)N - i N - 1

A= G i(1+i)N - i

8

Time Value of Money Relation

G Given

(P / G,i,N) 3G

(N-1)G

N 2G

G

0

P ??

(1+i)N - i N - 1

P= G i2 (1+i)N

9

2- Equivalent Annual Cost

Equivalent Annual Cost :EAC

EAC=P(A/P,i,n) - S(A/F,i,n) S

= (P-S) (A/P,i,n)+Si

Prove: n

10

2- Equivalent Annual Cost

i(1 + i) n i

(A/P, i, n) = (A/F, i, n) =

(1 + i) n 1 (1 + i) n 1

i(1 + i) n i(1 + i) n i[(1 + i) n 1]

(A/P, i, n) - i = i = =

(1 + i) 1

n

(1 + i) 1

n

i(1 + i) i (1 + i) + i

n n

i

= = ( A / F , i, n)

(1 + i) 1

n

(1 + i) 1

n

11

2- Equivalent Annual Cost

(A/P,i,n)-i= (A/F,i,n)

Then

EAC = P(A/P,i,n) - S(A/F,i,n)=

EAC = P(A/P,i,n) S[(A/P,i,n)-i]

EAC = (A/P,i,n)(P-S) + Si

12

Example 1

The price of the asset is 60,000 with

20,000 salvage value in 4 years and the

interest rate is 10%, Calculate the EAC

Solution

EAC= P(A/P,i,n) - S(A/F,i,n)

= 60,000(0.31547)-20,000(0.21547)

=$14,619

By using the equation:

EAC= (P-S)(A/P,I,n)+Si

=(60,000-20,000)(0.31547)+20,000(0.1)

= $14,619

13

Example 2

A citys data processing manager is considering replacing the

computer that is being used for utility billing. Known and

estimated cost relating to the current system are

value, $ $

0 12,000 -- --

1 8,000 5,000 28,000

2 3,000 6,000 32,500

Calculate the equivalent annual costs over the 2-year period?

Minimum Attractive Rate of Return

14

Solution 8,000 3000

0 1

2

5000

12000 6000

28000 32500

EAC= ($12,000 -3,000) (A/P, 10%, 2) +$3,000(0.1)

+[$5,000+$28,000)(P/F,10%,1)+(6,000+32,500)(P/F,

10%,2)](A/P,10%,2)

= 9000(0.57619) +300+

[33000(0.90909) +38500(0.82645)]

(0.57619)=41,105

15

Solution

The annual cost for the first year is calculated on

the assumption that 12,000 is the first cost of the

computer and 8000 is the salvage value after the

first year

8,000 3000

0 1

2

5000

12000 6000

28000

AC year 1

=12,000(A/P, 10%, 1)- 8,000+33,000=$38,200

16

Solution

Similarly,

AC for 2 years

= ($12,000 -3,000) (A/P, 10%, 2) +$3,000(0.1)

+[$5,000+$28,000)(P/F,10%,1)+(6,000+32,500)(P/F,

10%,2)](A/P,10%,2) =$ 41,105

3000

0 1

2

5000

12000 6000

28000

17

Solution

Recommendation is to delay replacement

until the start of the second year

EAC=41,105

AC year 1= $38,200

AC year 2= $ 41,105

equivalent annual cost of the defender tells

us to go with the new system since it has

a smaller EAC value

18

Example 3

consider the choice between a defender that has a current

market value of $5000 and a challenger that can be

purchased for $7500. Both have a service life of 3 years with

no salvage value expected at the end of that time. Their

operating costs are shown as

1 1,700 500 1,200

2 2,000 1,100 900

3 2,500 1,300 1200

MARR=12%

19

Solution

EAC (D) =[$5,000+$1700(P/F, 12%, 1) +

$2000(P/F, 12%, 2) +2500(P/F, 12%, 3)] (A/P,

12%, 3) =$4119

EAC (C) =[$75,000+$500(P/F, 12%, 1) +

$1100(P/F, 12%, 2) +1300(P/F, 12%, 3)] (A/P, 12%, 3)

=$4059

which indicates that it should replace the defender

+1,200(P/F, 12%, 3)] (A/P, 12%, 3)] =$60

20

Example 4

An asset was purchased 5 years ago for $52,000. It was

expected to have an economic life of 8 years, at which its

salvage value would be 4,000. If the function that the

asset was serving is no longer needed, for what price

must it be sold now to recover the invested capital when

i=12%.

S.V=4,000 now

4,000

when i=12%.

P=? N=8

$52,000

N=5

21

Solution

EAC= (P-S) (A/P, 0.12, 8) +S (0.12)

= (52,000-4,000) (0.20130) +4,000(0.12)

=48,000(0.2013) +480 =$10,142.4

is the present worth of the last 3 years

$10,142.4 (P/A, 0.12, 3) +4,000(P/F, 0.12, 3)

= $27,208

22

23

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