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14 July 2017

ASSIGNMENT #1
This is group assignment. Work in a group of strictly two members.
The due date for submission is 21 July 2017.
You are required to submit your answers to the letter box of A P Dr Zulkipli Ghazali
at level 3, Block 21.
Late submission will not be entertained.
Plagiarism will be dealt with seriously and no marks will be given to the group
members.
Please show your calculation clearly

1. An air compressor was placed in service 10 years ago for which a replacement
study has been requested. Due to its special design, the company decided that the
air compressor may have to be retained for one, two, three, or four more years
before it is being replaced with a new unit. The annual cost of the defender if
retained and the annual cost of the challenger for the expected service duration
are indicated in TABLE 1a. To simplify the calculation, use a rate of return of 0%
per year to perform the replacement study over a period of four years.

TABLE 1a: Annual Cost of Defender and Challenger


Annual Cost of
Annual Cost of
Challenger for
Time in service Defender if
Expected Service
(Years) Retained
Duration
($)
($)
1 10,500 13,500
2 11,214 12,964
3 11,950 12,918
4 12,607 13,211
Accordingly, there are four options available as illustrated in TABLE 1b.

TABLE 1b: Four Viable Replacement Options


Duration Defender is Duration Challenger is
Options expected to be retained expected to serve
(years) (years)
A 1 3
B 2 2
C 3 1
D 4 0

a. Construct cash flows diagrams for Option A, B, C and D.

[6 marks]

b. Evaluate the equivalent annual worth (AW) for Options A, B, C and D


respectively.

[16 marks]

c. Determine the most economical duration for the existing air compressor to
be retained before it is replaced with a new unit. Justify.
[3 marks]
2. An industrial lift truck has been in service for several years, and management is
contemplating replacing it. A planning horizon of six years is to be used in the
replacement study. The old lift truck has a current market value (MV) of $8,000.
If the old truck is retained, it is anticipated to have annual operating and
maintenance (O&M) costs of $9,000. The salvage value at the end of sixth year
is nil.
A new lift truck will cost $24,000 and will have O&M costs of $6,300. It will have
a salvage value of $10,000 at the end of the planning horizon.

Determine the preferred alternative, using equivalent present worth (PW)


comparison and MARR of 15% per year.

[15 marks]

3. A company is evaluating a replacement analysis of an industrial lift truck. A


planning horizon of six years is used in the replacement study.

OPTION 1:
An industrial lift truck has been in service for several years. The old lift truck has a
current market value (MV) of RM8,000. If the old truck is retained, it is anticipated
to have annual operating and maintenance (O&M) costs of RM9,000. The salvage
value at the end of sixth year is nil.

OPTION 2:
A new lift truck has an initial cost of RM X, its annual operating and maintenance
(O&M) costs is estimated at 8% of X, and the salvage value at the end of sixth year
is 20% of X. The company is using minimum attractive rate of return (MARR) of
10% per year in evaluating its investment proposal.
a. Calculate the equivalent present worth (PW) of the old lift truck.
[5 marks]

b. Solve for the initial cost (RM X) of the new lift truck if the equivalent present
worth (PW) of both options is the same.
[7 marks]

c. Determine the preferred alternative if the initial cost of the new lift truck is
RM35,000. Justify.

[5 marks]

d. Which is your preferred option if the MARR of the company is 20% per year?
Show your calculation.
[8 marks]

-END OF ASSIGNMENT #1-