An existing robot can be kept if $2,300 is spent now to upgrade it for future service requirements. Alternatively, the company can purchase a new robot to replace the old robot. The following estimates have been developed for both the defender and the challenger. The company's before-tax MARR is 25% per year. Based on this information, should the existing robot be replaced right now? Assume the robot will be needed for an indefinite period of time. Defender Challenger
Current MV $39,000 Purchase price $50,000
Required upgrade $2,300 Installation cost $5,000
Annual expenses $1,600 Annual expenses $1,000
Remaining useful life 6 years Useful life 10 years
MV at end of useful life -$1,500 MV at end of useful life $7,000
The AW value of the defender is: $.

Whenever an existing piece of equipment is considered for replacing by a new piece of equipment, the old piece is referred to as the defender, and the new piece of equipment is referred to as the challenger.  

The AW value of the defender is------------$15,729.

a) Data and Calculations:

Defender                                                Challenger

Current MV  -------$39,000                     Purchase price-------$50,000

Required upgrade----------$2,300           Installation cost------$5,000

Annual expenses-----------$1,600           Annual expenses -------$1,000

Remaining useful life--------6 years           Useful life ------10 years

MV at end of useful life------$1,500           MV at end of useful life--$7,000

Investment--------- $39,000 + $2,300           Investment = $50,000 + $5,000

= $41,300                                                           = $55,000

Present Value = ($41,300 +                      Present Value = ($55,000 +

)  = $46,021.60                  ) = $58,571

$46,022 + $393                $58,571 - $749 ()

Equivalent Annual Cost                             Equivalent Annual Cost

=                                                            =

= $15,729                                                        = $16,192

The overall expenses of owning, operating, and maintaining the robots for 6 - 10 years, correspondingly, are the Equivalent Annual Costs (or Average Weighted Value).

The old robot will incur an additional cost of $1,500 to retire it, but the new robot will have a salvage value of $7,000. After discounting to the current value, these are included in the comparable yearly expenses.

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The AW value of the defender is: $15,729.

Explanation:

a) Data and Calculations:

Defender                                                Challenger

Current MV                    $39,000           Purchase price            $50,000

Required upgrade           $2,300           Installation cost             $5,000

Annual expenses             $1,600           Annual expenses           $1,000

Remaining useful life      6 years           Useful life                     10 years

MV at end of useful life  -$1,500           MV at end of useful life $7,000

Investment = $39,000 + $2,300           Investment = $50,000 + $5,000

= $41,300                                                = $55,000

Present Value = ($41,300 +                   Present Value = ($55,000 +

$1,600 x 2.951)  = $46,021.60               $1,000 x 3.571) = $58,571

$46,022 + $393 ($1,500 x .262)            $58,571 - $749 ($7,000 x .107)

Equivalent Annual Cost                         Equivalent Annual Cost

= $46,415/ 2.951                                     = $57,822/3.571

= $15,729                                                = $16,192

The robots' Equivalent Annual Costs (or Average Weighted Value) are the total costs of owning, operating, and maintaining the robots for 6 years and 10 years respectively.  For the old robot, additional cost of $1,500 will be incurred to retire the asset, while the new robot will have a salvage value of $7,000.  These are factored into the equivalent annual costs, after discounting them to their present values.

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