Question

The Ajax Corporation has an overhead crane that has an estimated remaining life of 10 years. The crane could be sold now for $8,000. If the crane is kept in service, it must be overhauled immediately at a cost of $5,000. Operating and maintenance costs will be $3,000 per year after the crane is overhauled. The overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,000 MV at that time. Operating and maintenance costs are $1,000 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives. In considering whether or not to replace the old crane, what is the AW of the preferred alternative? (Consider costs as a positive number, since these are both cost alternatives.)

Answer 1