1. The Ajax Corporation has an overhead crane that has an estimated remaining life of 10...

1. The Ajax Corporation has an overhead crane that has an estimated remaining life of 10 years. The crane can be sold now for $8,000. If the crane is kept in service, it must be overhauled immediately at a cost of $4,000. After the crane is overhauled, O&M costs will be $3,000 in the first year and will escalate at 5%/year thereafter. The overhauled crane will have zero MV at the end of the 10-year study period. A new crane will cost $25,000, will last for 10 years, and will have a $4,000 MV at that time. O&M costs are $1000 in the first year and will escalate at 2%/year thereafter. The company uses a before-tax MARR of 10% in evaluating investment alternatives. Should the company replace the old crane? Does the decision change if the new crane has zero salvage value? Use PW analysis and calculate the NPV. Please show how this is done in Excel.

Expert Solution

Answer 1
Calculation of NPV if old crane is replaced
Year	0	1	2	3	4	5	6	7	8	9	10	NPV
Cost of new crane	-$25,000.00
Salvage value of old crane	$8,000.00
Salvage value of new crane											$4,000.00
Savings in O & M Cost		$2,000.00	$2,130.00	$2,267.10	$2,411.67	$2,564.09	$2,724.76	$2,894.12	$3,072.62	$3,260.71	$3,458.89
Net Cash flow	-$17,000.00	$2,000.00	$2,130.00	$2,267.10	$2,411.67	$2,564.09	$2,724.76	$2,894.12	$3,072.62	$3,260.71	$7,458.89
X Discount Factor @ 10%	1	0.909	0.826	0.751	0.683	0.621	0.564	0.513	0.467	0.424	0.386
Present Values	-$17,000.00	$1,818.18	$1,760.33	$1,703.31	$1,647.20	$1,592.10	$1,538.06	$1,485.14	$1,433.40	$1,382.86	$2,875.73	$236.30
As the NPV of replacing the old crane is positive , company should replace the old crane.

Calculation of savings O & M Cost
Year	1	2	3	4	5	6	7	8	9	10
O & M cost of old machine	3,000.00	3,150.00	3,307.50	3,472.88	3,646.52	3,828.84	4,020.29	4,221.30	4,432.37	4,653.98
Less : O & M Cost of new machine	1,000.00	1,020.00	1,040.40	1,061.21	1,082.43	1,104.08	1,126.16	1,148.69	1,171.66	1,195.09
Savings in O & M Cost	2,000.00	2,130.00	2,267.10	2,411.67	2,564.09	2,724.76	2,894.12	3,072.62	3,260.71	3,458.89

Answer 2
Yes the decision will change if the new crane has zero salvage value.
In this case , the NPV turns out to be negative which is equal to -$1305.87

jeff jeffy answered 2 years ago

The Ajax Corporation has an overhead crane that has an estimated remaining life of 10 years....

The Ajax Corporation has an overhead crane that has an estimated remaining life of 10 years. The crane can be sold now for $8,000. If the crane is kept in service, it must be overhauled immediately at a cost of $4,000. After the crane is overhauled, O&M costs will be $3,000 in the first year and will escalate at 5%/year thereafter. The overhauled crane will have zero MV at the end of the 10-year study period. A new crane will...

1.) Ajax corporation has a project with a 10 year life and a $200,000 cost. The...

1.) Ajax corporation has a project with a 10 year life and a $200,000 cost. The project is depreciated straight life over the life of the project. Other fixed costs amount to $400,000 and variable costs per unit are $30. If the company intends on selling 50,000 units and has a 10% return requirement, calculate the company’s financial break-even price 2.) Scorpio Inc. is a seafood company specializing in crayfish. Each pound of crayfish cost $25 to produce and can...

ABC Corporation wants to purchase an old office building with an estimated remaining service life of...

ABC Corporation wants to purchase an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed long-term leases, which leads you to believe that the current rental income of $250,000 per year will remain constant for the first 5 years. Then the rental income will increase by 10% for every 5-year interval over the remaining life of the asset. For example, the annual rental income would be $275,000 for years 6 through 10, $302,500...

1. Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated...

1. Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of eight years, or 12,500 hours of operation. The crane was purchased on January 1, 2017, and was used 2,700 hours in 2017 and 2,600 hours in 2018. Refer to the information for Norwood, Inc. If Norwood uses the straight-line depreciation method, what is the book value at December 31, 2019? a.$51,875 b.$67,500 c.$46,875 d.$62,500 2....

At the end of 2020, Bridgeport Corporation owns a licence with a remaining life of 10...

At the end of 2020, Bridgeport Corporation owns a licence with a remaining life of 10 years and a carrying amount of $528,000. Bridgeport expects undiscounted future cash flows from this licence to total $532,500. The licence’s fair value is $423,000 and disposal costs are estimated to be nil. The licence’s discounted cash flows (that is, value in use) are estimated to be $477,700. Bridgeport prepares financial statements in accordance with IFRS. Determine if the licence is impaired at the...

1. XYZ Manufacturing Corporation currently has production equipment that has 4 years of remaining life. The...

1. XYZ Manufacturing Corporation currently has production equipment that has 4 years of remaining life. The equipment was purchased a year ago at a cost of $10,000. The annual depreciation for this machine is $1,800 and its expected salvage value is $1,000. The equipment can be sold today for $8,000. The company has been considering the purchase of a new machine that will replace the existing one. The new equipment costs $15,000 and would increase sales (through increased production) by...

1. A plant asset purchased for $725,000 has an estimated life of 10 years and a...

1. A plant asset purchased for $725,000 has an estimated life of 10 years and a residual value of $36,250. Depreciation for the second year of use, determined by the declining-balance method at twice the straight-line rate is 2. A plant asset purchased for $638,000 at the beginning of the year has an estimated life of 5 years and a residual value of $58,000. Depreciation for the third year, determined by the sum-of-the-years'-digits method is $ A plant asset with...

On July 1, 2019, Crane Company purchased new equipment for $90,000. Its estimated useful life was...

On July 1, 2019, Crane Company purchased new equipment for $90,000. Its estimated useful life was 7 years with a $13,000 salvage value. On December 31, 2022, the company estimated that the equipment’s remaining useful life was 10 years, with a revised salvage value of $5,000. Prepare the journal entry to record depreciation on December 31, 2019. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for...

A currency swap has a remaining life of 5 months. It involves exchanging interest at 10%...

A currency swap has a remaining life of 5 months. It involves exchanging interest at 10% on £20 million for interest at 6% on $30 million once a year. If the swap were negotiated today the interest rates exchanged would be 5% in dollars and 8% in sterling. All interest rates are quoted with annual compounding. The current exchange rate (dollars per pound sterling) is 1.8500. What is the value of the swap to the party paying sterling? What is...

Consider a bond that pays $50 semi-annual interest and has a remaining life of 10...

Consider a bond that pays $50 semi-annual interest and has a remaining life of 10 years. The bond currently sells for $987 and has a yield to maturity of 10.20%. What is the bond’s duration? What is its modified duration? What is its convexity? What percentage change in bond price would be expected for one percent decrease in interest rate?

Question