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NPV and EAC assume that this will involve the replacement of an equivalent engine at...

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Accounting

NPV and EAC assume that this will involve the replacement of an equivalent engine at either five or seven years.

Alternative 1 - Purchase second-hand Engine for $ 178,180

Costs associated with overhaul and reconditioning $155,000

Post operating costs per annum: $625,000

Trade-In Value 10 years $20,000 Trade-In Value 7 years $50,000 Trade-In Value 5 years $80,000

Alternative 2 - Purchase NEW Engine for $ 930,000. (50% of the payment for the engine to be made immediately with the balance due in annual increments of $155,000 in years 1, 2 and 3) and it will cost $25,000 to have the engine integrated (Payment immediately)

Post operating costs per annum: $485,000

Insurance costs will be $70,000 in year 1 but are expected to reduce by 5% each year

Trade-In Value 10 years $180,000 Trade-In Value 7 years $290,000 Trade-In Value 5 years $400,000

Discount Rate 11%

Note: assume that depreciation and taxation do not need to be included in any calculations

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