LECTURE NOTE SLIDE 14:

Example: Replacement Analysis; Specified Period 1 5 An asset purchased 2 years ago for $40,000 is harder to maintain than expected. It can be sold now for $12,000 or kept for a maximum of 2 more years, in which case its operating cost will be $20,000 each year, with a salvage value of $10,000 after 1 year or $9000 after two. A suitable challenger will have an annual worth of $-24,000 per year. At an interest rate of 10% per year and over a study period of exactly 2 years, determine when the defender should be replaced. Solution: From previous analysis, AWD for 1 and 2 years, and AW; are: AWDI = $ _ 23,200 AWDZ = $ _ 22,629 AWC = $ _ 24,000 mmm 1(0 C C) -24 000 -24 000 44 000 44 00 Decision: Option 3; 2(D, C, C) 23,200 44,000 44,000 23,708 Keep D for 2 years, 3 (D, D, C) 22,629 42,629 24,000 43,042 then replace