Benha University Engineering Economics & Accounting

Faculty of Engineering at Shoubra 1st Term 2023/2024

Mechanical Engg. Dept.(2nd Year) Assignment No. 4

Subject: Replacement Analysis

[1] Assume that a compact automobile has been purchased by the XYZ Rental Car
Company for $12,000, and its expected annual O&M costs and salvage values are
given in the following table. Determine its optimum economic life, in integer years, if
the MARR is 30%.
Year (N) Annual O&M Costs $/yr End of year Salvage Value, $
1 2,000 9,000
2 3,000 8,000
3 4,000 7,000
4 5,000 6,000
5 6,000 5,000
[2] A steam generation system at a biomass-fueled power plant uses an electrostatic
precipitator (ESP) to clean its gaseous effluents. The power plant has consistently
made use of the same type of ESP over the past several years. The installed cost of a
new ESP has been relatively constant at $80,000. Records of operation and
maintenance expenses indicate the following average expenses per year as a function
of the age of the ESP. The MVs of the ESP are also reasonably well known as a
function of age.
year 1 2 3 4 5
O&M expense, $ 30,000 30,000 35,000 40,000 45,000
Market value, $ 60,000 50,000 40,000 25,000 12,500
Determine the best time to replace the ESP if the MARR is 15% per year.
[3] Machine H was purchased 5 years ago for $40,000 and had an expected life of 10
years. The past and estimated future maintenance and operating costs and salvage
values are given below. At a value of i = 10%, determine the number of years the asset
should be kept in service before replacement.
Year Operating Cost, $ Maintenance cost, $ Salvage value, $
1 1,500 2,000 25,000
2 1,600 2,000 25,000
3 1,700 2,000 22,000
4 1,800 2,000 22,000
5 1,900 2,000 15,000
6 2,000 2,100 5,000
7 2,100 2,700 5,000
8 2,200 3,300 0
9 2,300 3,900 0
10 2,400 4,500 0

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[4] Fluid Dynamics Company owns a pump that it is contemplating replacing. The
old pump has annual operating and maintenance costs of $8000/year, it can be kept for
4 years more and will have a zero salvage value at that time. The old pump can be
traded in on a new pump. The trade-in value is $4000. The new pump will cost
$18,000 and have a value of $9000 in 4 years and will have annual operating and
maintenance costs of $4500/year. Use a MARR of 20%, evaluate the investment
alternative based upon the present worth method and a planning horizon of 4 years.

[5] A building supplies distributor purchased a gasoline-powered lift truck 4 years

ago for $8000. At that time, the estimated useful life was 8 years with a salvage value
of $800 at the end of this time. The truck can now be sold for $2500. For this truck,
average annual operating expenses for are expected to be $2000 the next year and
increase $200 each following year. Now the distributor is considering the purchase of
a smaller battery-powered truck for $6500. The estimated life is 10 years, with the
salvage value decreasing by $600 each year. Annual costs are expected to be $1200.
If MARR = 20% and a 4-year study period is used, should the replacement be made
now?

[6] Assume that a manufacturing company has equipment (i.e., defender) that was
installed 6 years ago for $150,000 and has a present market value of $50,000 that is
expected to decrease $5,000 per year. If the defender is kept one more year, its O&M
costs will be $75,000 with increases of $20,000 per year thereafter. The engineering
manager of the company is considering installing new equipment (i.e., challenger) at a
cost of $200,000. The challenger will have an expected salvage value of $10,000 at the
end of its useful life of 10 years. Its annual O&M costs will be $50,000. If MARR is
20%, determine when the defender should be replaced. Assume that the estimates of
the installed first cost and salvage value of the challenger are going to remain constant.

[7] A diesel engine was installed 10 years ago at a cost of $50,000. It has a present
realizable market value of $14,000. If kept, it can be expected to last 5 more years,
have operating expenses of $14,000 per year, and have a salvage value of $8,000 at the
end of the 5 years. This engine can be replaced with an improved version costing
$65,000 and having an expected life of 20 years. This improved version will have
estimated annual operating expenses of $9,000 and an ultimate salvage value of
$13,000. It is thought that an engine will be needed indefinitely and that the results of
the economy study would not be affected by the consideration of income taxes. Using a
before-tax MARR of 15%, make an annual-cost analysis to determine whether to keep
or replace the old engine.

[8] State-of-the-art digital imaging equipment purchased 2 years ago for $50,000 had
an expected useful life of 5 years and a $5000 salvage value. After its installation the
performance was poor, and it was upgraded for $20,000 one year ago. Increased

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demand now requires another upgrade for an additional $22,000 so that it can be used
for 3 more years. Its new annual operating cost will be $27,000 with a $12,000 salvage
after the 3 years. Alternatively, it can be replaced with new equipment costing $65,000,
an estimated AOC of $14,000, and an expected salvage of $23,000 after 3 years. If
replaced now, the existing equipment can be traded for only $7000. Use a MARR of
10% per year. (a) Determine whether the company should retain or replace the
defender now. (b) Based on the poor experience with the current equipment, assume
the person doing this analysis decides the challenger may be kept for only 2 years, not
3, with the same AOC and salvage estimates for the 2 years. What is the decision?

[9] Three years ago, Witt Gas Controls purchased equipment for $80,000 that was
expected to have a useful life of 5 years with a $9000 salvage value. Increased demand
necessitated an upgrade costing $30,000 one year ago. Technology changes now
require that the equipment be upgraded again for another $25,000 so that it can be used
for 3 more years. Its annual operating cost will be $48,000 and it will have a $19,000
salvage value after 3 years. Alternatively, it can be replaced with new equipment that
will cost $68,000 with operating costs of $35,000 per year and a salvage value of
$21,000 after 3 years. If replaced now, the existing equipment will be sold for $12,000.
a) Calculate the annual worth of the defender at an interest rate of 10% per year.
b) Determine the AW of the challenger over 3 years and select it or the defender.

[10] An apartment complex installed a furnace 8 years ago at a cost of $20,000 to

provide the necessary heating. Because of new additions, the existing unit will supply
only 50% of the forecasted heating requirements.
Currently, this old furnace has a salvage value of $9,000, and it is estimated that it
can be used for an additional 8-year period, with annual operating cost of $7,000, and a
zero salvage value at the end of that time.
If the old furnace is retained‫احتفظ به‬, a new unit with the same capacity will be
purchased at a cost of $18,000, it is estimated that its service life, final salvage value,
and operating costs are, respectively, 10 years, $3,000, and $6,000 per year.
Another possibility is to buy a new furnace having the capacity of the two small
units. This new furnace has an initial cost of $32,000, estimated life of 12 years with
$4,000 salvage value at the end of that time, and annual operating costs of $11,000.
a) Define all the alternatives that can be evaluated with the information given in the
statement of the problem.
b) If the MARR is 15%, and using outsider viewpoint approach, which alternative
should be selected?

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