Question

Engineering Economics

In 2018, a certain manufacturing company has some existing semi-automated production equipment which they are considering replacing. This equipment has a present market value of $62,000 and a book value of $35,000. It has five more years of straight-line depreciation available (if kept) of $7,000 per year, at which time its BV would be zero. The estimated market value of the equipment five years from now (in year 0 dollars) is $17,200. The market value escalation rate on this type of equipment has been averaging 3.1% per year. The total annual operating and maintenance (0 & M) expense and other related expenses are averaging $27,600 per year.New automated replacement equipment would be leased. Estimated O & M and related company expenses for the new equipment are $13,200 per year. The annual leasing costs would be $23,900. The MARR (after-tax including inflation component) is 10%, the effective tax rate is 25%, and the study period is five years. Based on an after-tax, A$ analysis, should the new equipment be leased? Use the IRR method.


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