Question

A forklift will last for only 4 more years. It costs $6,100 a year to maintain. For $16,000 you can buy a new lift that can last for 9 years and should require maintenance costs of only $3,100 a year. a-1. Calculate the equivalent cost of owning and operating the forklift if the discount rate is 6% per year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) a-2. Should you replace the forklift? b-1. Calculate the equivalent cost of owning and operating the forklift if the discount rate is 14% per year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Should you replace the forklift?

Answer 1

For the existing forklift, asset price is treated as nil since there is no additional cost involved.

Part a-1: At the discount rate of 6% per year:

Equivalent Annual Cost of operating the existing forklift= $10,000

Equivalent Annual Cost of buying and operating new forklift= $5,452.36

Details of computation as follows:

Part a-2: Since the equivalent annual cost of replacing the forklift is less, the same is opted.

Part b-1: At the discount rate of 14% per year:

Equivalent Annual Cost of operating the existing forklift= $10,000

Equivalent Annual Cost of buying and operating new forklift= $6334.69

Details of computation as follows:

Part b-2: Since the equivalent annual cost of replacing the forklift is less, the same is opted.