A plant is considering the replacement of a piece of equipment in its materials handling system with a new piece. If the company's cost of capital is 10%. Should the present asset be kept or replaced ?. state your recommendation. { TIP: calculate the EAC (Equivalent annual cost) of each of the two options } the following data are provided:
Present asset
Present salvage value : $10.000
Economic life : 1 Year
Next Year's operating and maintenance costs: $51,000
Salvage value in one year: $5,000
Replacement alternative
Capital cost: $200.000
Economic Life: 8 years
Operating and maintenance costs:
Years 1-2: $15,000 per year
Years 3-4: $20,000 per year
Years 5-6: $25,000 per year
Years 7-8: $30,000 per year
Salvage value in 8 years : 25,000
Note: all calculations are approximated to the nearest $100 Option A= keep the old piece of equipment for one more year Option B= buy the new piece and sell the old piece of equipment