Replacement Analysis

Economic life (6 questions)

Suppose a new forklift truck costs $30,000. Its subsequent market values (i.e., amount that equipment can sell for) and annual expenses are listed below. Here, we assume an annual interest rate of 10% in our computations.

Marginal cost analysis (24 questions)

In the previous section, we explained how the EUAC of owning and operating equipment can be computed based on actual cash flows. In this section, we illustrate how a similar analysis can be performed based on marginal cost. (i.e., incremental cost of owning and operating the equipment for one more year). Suppose a new forklift truck costs $30,000. Its subsequent market values (i.e., amount that equipment can sell for) and annual expenses are listed below. Here, we assume an annual interest rate of 10% in our computations.

Replacement analysis (7 questions)

In this section, we illustrate how the decision to replace an existing equipment depends on the EUAC of the replacement equipment at its economic life. 

Suppose your existing forklift truck has a current market value of $17,000. If you were to continue using this forklift truck, its annual expenses and subsequent market values are listed below. Furthermore, the cost structure of a new forklift is the same as that discussed in the previous two sections. In particular, its EUAC at economic life is $12,918 (see Questions 3 and 20).

After-tax costs (5 questions)

In this section, we examine the effects of tax on costs. Suppose that your annual revenue is $100M and assume a flat tax rate of 20%.

After-tax EUAC (2 questions)

In the first section, we looked at how to determine the annual cost of owning and operating equipment. In the previous section, we highlighted that costs are lower after tax considerations. In the context of owning and operating equipment, annual expenses and depreciation both reduce the amount of tax payable. In this section, we examine how after-tax EUAC can be computed.

Suppose a new forklift truck costs $30,000. Its subsequent market values (i.e., amount that equipment can sell for) and annual expenses are listed below. Assume a flat tax rate of 20%, SL depreciation across 3 years with zero salvage value and an annual interest rate of 8%.