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Contemporary Engineering Economics 6th Edition by Chan Park
Edition 6ISBN: 978-0134162690Contemporary Engineering Economics 6th Edition by Chan Park
Edition 6ISBN: 978-0134162690 Exercise 1
Consider the following two options related to one of the old but special machine tools in your machine shop.
• Option 1: You continue to use the old machine tool that was bought four years ago for $12,000. It has been fully depreciated but can be sold for $2,000. If kept, it could be used for three more years with proper maintenance and with some extra care. No salvage value is expected at the end of three years. The maintenance costs would run $10,000 per year for the old machine tool.
• Option 2: You purchase a brand-new machine tool at a price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of three years and will have a salvage value of $5,000 at the end of that time. With the new machine tool, the expected operating and maintenance costs (with the scrap savings) amount to $3,000 each year for three years.
(a) For the old machine tools, what would be the amount of sunk cost that should be recognized in replacement analysis?
(b) What is the opportunity cost of retaining the old machine tool now?
(c) What is the net incremental benefit (or loss) in present value associated with replacing the old machine tool at an interest rate of 15%?
• Option 1: You continue to use the old machine tool that was bought four years ago for $12,000. It has been fully depreciated but can be sold for $2,000. If kept, it could be used for three more years with proper maintenance and with some extra care. No salvage value is expected at the end of three years. The maintenance costs would run $10,000 per year for the old machine tool.
• Option 2: You purchase a brand-new machine tool at a price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of three years and will have a salvage value of $5,000 at the end of that time. With the new machine tool, the expected operating and maintenance costs (with the scrap savings) amount to $3,000 each year for three years.
(a) For the old machine tools, what would be the amount of sunk cost that should be recognized in replacement analysis?
(b) What is the opportunity cost of retaining the old machine tool now?
(c) What is the net incremental benefit (or loss) in present value associated with replacing the old machine tool at an interest rate of 15%?
Explanation
Verified
Verified
In economics, the opportunity cost refer...
Contemporary Engineering Economics 6th Edition by Chan Park
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