Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

COLLEGE OF ENGINEERING

BES 4 – ENGINEERING ECONOMICS

Activity #3F: Replacement Analysis and Break-even Analysis
Name: __________________________________ Course/Yr/Block: __________

Intended Learning Outcome:

• Recognize the sunk costs of existing equipment, the risks of new and old equipment, and the
required long-term perspective on repair versus replace.
• Select the optimal design alternative.
• Determine break-even point.
Content/Topics: Comparison of Alternative
Directions: Solve the following problems on a clean sheet of paper. Show a complete solution
and write legibly. Use ballpens only.

1. You own an old “water skiing” motor boat that is a real gas guzzler. It is 10-years old and can
be sold now for $3,000 cash. Assume its market value (MV) in 2 years will be $500. The
annual maintenance expenses are expected to be $400 into the foreseeable future, and the
boat averages only 2 miles per gallon of fuel. Gasoline costs $5.00 per gallon, and the boat
will be used for about 200 miles per year. If you sell the old boat, you can buy a newer model
boat for $10,000. It will be under a maintenance warranty for 2 years, so this expense is
negligible. The newer boat will average 10 miles per gallon of fuel and will have an MV of
$7,000 in 2 years. Use a 2-year study period to determine which alternative is preferred. The
MARR is 15% per year. State your assumptions.
2. An existing robot can be kept if $2,000 is spent now to upgrade it for future service
requirements. Alternatively, the company can purchase a new robot to replace the old robot.
The following estimates have been developed for both the defender and the challenger.

The company’s before-tax MARR is 20% per year. Based on this information, should the existing
robot be replaced right now? Assume the robot will be needed for an indefinite period of time.

3. An area can be irrigated by pumping

water from a nearby river. Two
competing installations are being
considered. The MARR is 12% per
year and electric power for the
pumps costs $0.06 per kWh. Recall
that 1 horsepower (hp) equals 0.746
kilowatts. At what level of operation

BES 4 – Engineering Economics Page 1 of 2

 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines

COLLEGE OF ENGINEERING

(hours per year) would you be indifferent between the two pumping systems? If the pumping
system is expected to operate 2,000 hours per year, which system should be recommended?
4. A large city in the mid-West needs to acquire a street-cleaning machine to keep its roads
looking nice year-round. A used cleaning vehicle will cost $85,000 and have a $20,000
market (salvage) value at the end of its five-year life. A new system with advanced features
will cost $150,000 and have a $40,000 market value at the end of its five-year life. The new
system is expected to reduce labor hours compared with the used system. Current street-
cleaning activity requires the used system to operate 8 hours per day for 20 days per month.
Labor costs $50 per hour (including fringe benefits), and MARR is 12% per year. Find the
breakeven percent reduction in labor hours for the new system.

“Self-discipline is the magic power that makes you virtually unstoppable.”

- Dan Kennedy

BES 4 – Engineering Economics Page 2 of 2