Question

Engine oil purifier machines can effectively remove acid, pitch, particles, water, and gas from used oil. Purifier A was purchased 5 years ago for $90,000. Its operating cost is higher than expected, so if it is not replaced now, it will likely be used for only 3 more years. Its operating cost this year will be $140,000, increasing by $2000 per year through the end of its useful life, at which time it will be donated for its recyclable scrap value. A more efficient challenger, purifier B, will cost $150,000 with a $50,000 salvage value after its 8-year ESL. Its operating cost is expected to be $82,000 for year 1, increasing by $500 per year thereafter. What is the market
value for A that will make the two purifiers equally attractive at an interest rate of 12% per year?
a) [hand calculation]
b) [Use MS Excel]

Answer 1

Answer:
	Total costs of Purifier A, when market value is $x	equals	340698	minus	0.71178x
	Year	PV factor	Operating cost	PV of OC	Salvage	PV of salvage
	0	1.00	-		-	-
	1	0.89	140,000.00	125,000.00	-	-
	2	0.80	142,000.00	113,201.53	-	-
	3	0.71	144,000.00	102,496.36	x	0.71178x
				340,697.89
	Total costs of Purifier B	equals	1,50,000+4,14,582-20,194	equals	544,388.02
	Year	PV factor	Operating cost	PV of OC	Initial cost	PV of initial cost	Salvage	PV of salvage
	0	1.00	-	-	150,000.00	150,000.00	-	-
	1	0.89	82,000.00	73,214.29	-	-	-	-
	2	0.80	82,500.00	65,768.49	-	-	-	-
	3	0.71	83,000.00	59,077.76	-	-	-	-
	4	0.64	83,500.00	53,065.76	-	-	-	-
	5	0.57	84,000.00	47,663.86	-	-	-	-
	6	0.51	84,500.00	42,810.33	-	-	-	-
	7	0.45	85,000.00	38,449.68	-	-	-	-
	8	0.40	85,500.00	34,532.02	-	-	50,000.00	20,194.16
				414,582.19		150,000.00		20,194.16
	So, in order to make both the purifiers equally attractive,
	Total costs of A	equals	Total costs of B
	3,40,698 - 0.71178x	equals	544,388.02
	x		equals	286,169.92
	Therefore, market value of A = $ 2,86,170