A piece of equipment now is use at a plant is under consideration for replacement. It has a market value of 8,000. This market value is expected to decline by 50% in the second period reaching zero at the end of period 3. The estimated operating and repair cost for the next period is 26,000 and this is expected to grow at a rate of 15 percent per period. A replacement has been located that will cost 32,000 to purchase. After one period the market value of this new equipment will be 22,000 and this value is expected to decrease by 35% per period from the prior period until the expected end of service after 7 periods. The first period operating cost is expected to be 14,000 increasing by 15 percent per year. Applying an interest rate of 12%, answer the questions below.
a. What is the period cost of using the existing equipment just one more period?
b. What is the lowest period equivalent cost for keeping the new replacement equipment in operation for its economic service life?
c. What is the economic service life of the new replacement?
d. Based on your analysis, what should the decision be now regarding replacement? Code ‘1’ to keep the existing equipment at least one more period; Code ‘2’ to get the replacement now.