Question

A piece of production equipment is to be replaced immediately because it no longer meets quality requirements for the end product. The two best alternatives are a used piece of equipment(E1) and a new automated model(E2). The economic estimates for each are shown in the accompanying table:

	E1	E2
Capital investment	$14,000	$65,000
Annual expenses	$14,000	$9,000
Useful life (in years)	5	20
Market value (at the end of its useful life)	$8,000	13,000

Required:

1. Which alternative is preferred, based on the repeatability assumption?

2. Show, for the coterminated assumption with a five year study period and an imputed market value for alternative b, that the AW of b remains the same as it was in part 1. Explain why that occurs in this problem.

Answer 1

1. Which alternative is preferred, based on the repeatability assumption?

2. Show, for the coterminated assumption with a five year study period and an imputed market value for alternative b, that the AW of b remains the same as it was in part 1. Explain why that occurs in this problem.

Refer to the below image for the above mentioned requirements, in a detailed way of solution.