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Using an EUAC and a cash flow approach
Course:- Business Economics
Reference No.:- EM13978555




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Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $13,000 per year. Alternative A is to the keep the existing auger. It has a current market value of $12,000 and it will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $54,000 and will have a $14,000 salvage value after 7 years. O&M costs are $6,000 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a "treated auger" that requires vastly less O&M cost at only $3,000 per year. It costs $68,000, and the trade-in allowance for the existing auger is $17,000. The "treated auger" will have a $18,000 salvage value after 7 years. Alternative D is to sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retrainer payment of $10,000. End-of-year O&M cost would be $6,000. MARR is 15% and the planning horizon is 7 years.

a) Clearly show the cash flow profile for each alternative using a cash flow approach (insider's viewpoint approach).

b) Using an EUAC and a cash flow approach, decide which is the more favorable approach.

c) Clearly show the cash flow profile for each alternative using an opportunity cost approach (outsider's viewpoint approach).

d) Using an EUAC comparison and an opportunity cost approach, decide which is the more favorable alternative.




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