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Identify Alternatives
Best Challenger
Not Available
Find lowest EUAC for Defender Analysis Technique 2: Defenders lowest EUAC Challengers EUAC at its minimum cost life
Copyright Oxford University Press 2009
Find EUAC over given life Analysis Technique 3: Defenders EUAC over its remaining life Challengers EUAC at its min. cost life
Because of increasing operating and maintenance costs, the minimum cost life is often shorter than the assets useful life. EUAC for each possible life, less than or equal to the useful life, is determined. The number of years at which the EUAC is minimum can then be identified.
Total EUAC
O&M
Capital Recovery
Year
Copyright Oxford University Press 2009
Identify Alternatives
Best Challenger
Not Available
Find lowest EUAC for Defender Analysis Technique 2: Defenders lowest EUAC Challengers EUAC at its minimum cost life
Copyright Oxford University Press 2009
Find EUAC over given life Analysis Technique 3: Defenders EUAC over its remaining life Challengers EUAC at its min. cost life
Capital recovery cost (loss in market value and loss interest for the year) Yearly operating and maintenance costs Yearly taxes and insurance Any other expenses that occurs during that year
Capital Recovery Cost = MVN-1(A/P, 15%, 1) MVN(A/F, 15, 1) = MVN-1(1+15%) MVN(1) = (MVN-1 MVN) + MVN-1(15%)
Copyright Oxford University Press 2009
Capital Recovery Cost = MVN-1(A/P, 15%, 1) MVN(A/F, 15, 1) = MVN-1(1+15%) MVN(1) = (MVN-1 MVN) + MVN-1(15%)
Copyright Oxford University Press 2009
Replacement Analysis Technique 1: Defender Marginal Cost Increasing Maintain the Defender as long as the marginal cost of ownership for one more year is less than the Challengers minimum EUAC. When the Defenders marginal cost becomes greater than the Challengers minimum EUAC, then replace the Defender with the Challenger.
Present Challenger Cost EUAC 15,435.40 $17,750.00 26,928.12 16,563.95 36,100.25 15,811.20 44,305.58 15,518.57 51,713.86 15,426.83* 58,457.74 15,446.61 64,829.25 15,582.46
Year 1 2 3 4 5
Replacement Repeatability Assumption Currently available best Challenger will continue to be available in subsequent years and will be unchanged in its economic costs. When the Defender is ultimately replaced, it will be replaced with this Challenger. The period of needed services of the asset is indefinitely long.
Replacement Analysis Technique 2: Defender Marginal Cost Not Increasing Calculate the Defenders minimum EUAC. If the Defenders minimum EUAC exceeds the Challengers minimum EUAC, then replace immediately. If the Defenders minimum EUAC is lower than the Challengers minimum EUAC, then the Defender will be kept at least the minimum cost life. After the minimum cost life, then replace when the Defenders increasing marginal cost exceeds the Challengers minimum EUAC. (Technique 1)
Copyright Oxford University Press 2009
Year 1 2 3 4 5
Year 0 1 2 3 4 5
Replacement Analysis Technique 3: Defender Marginal Cost Not Available Calculate the Defenders EUAC over its stated useful life. If the Defenders EUAC exceeds the Challengers minimum EUAC, then replace immediately. If the Defenders EUAC is lower than the Challengers minimum EUAC, then the Defender will be kept.
Defender: SK-30, Original cost: $1600 (Basis for SL depreciation) Present cost: $995 (Irrelevant) Book value: $800 (Useful in determining depreciation recapture or loss) Trade-in value: $350 (Irrelevant) Market value: $200 (First cost assigned to Defender)
Copyright Oxford University Press 2009