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.

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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 1 year ago

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