Question

An industrial lift truck has been in service for several years, and management is contemplating replacing it. A planning horizon of five years is to be used in the replacement study. The Old lift truck (defender) has a current MV of $7,000. If the defender is retained, it is anticipated to have annual operating and maintenance costs of $8,000. It will have a zero MV at the end of five additional years of service. The new lift truck (challenger) will costs $22,000 and will have operating and maintenance costs of $5,100. It will have an MV of $9,000 at the end of the planning horizon. Determine the preferred alternative, using a PW comparison and a minimum attractive rate of return (before taxes) of 20% per year.

Answer 1

SOLUTION:-

Let us first calculate the PW of old lift truck.

Initial Cost=C=$7000 (current market value)

Annual operation and maintenance expenses=O=$8000

Salvage=S=0

MARR=i=20%

PW of old lift truck=-C-O*(P/A,0.20,5)+S*(P/F,0.20,5)

PW of old lit truck=-7000-8000*(P/A,0.20,5)+)*(P/F,0.20,5)

Interest factor can be calculated as under

PW of old lift truck=-7000-8000*2.990612+0*0.401878=-$30,924.90

Negative sign indicates that its a cost

Let us first calculate the PW of new lift truck.

Initial Cost=C=$22000

Annual operation and maintenance expenses=O=$5100

Salvage=S=$9000

Period=n=5 years

MARR=i=20%

PW of new lift truck=-C-O*(P/A,0.20,5)+S*(P/F,0.20,5)

PW of new lift truck=-22000-5100*(P/A,0.20,5)+9000*(P/F,0.20,5)

PW of new lift truck=-22000-5100*2.990612+9000*0.40188=-$33635.22

Negative sign indicates that its a cost

PWs of both options show that new lift truck is more expensive as compared to old one.

So, Old lift truck should be preferred.

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