The Cyclone Corporation Is Contemplating the Replacement of Some Old

question 44

Essay

The Cyclone Corporation is contemplating the replacement of some old equipment. The pertinent information is as follows: $\begin{array}{lll}&\text { Old Equipment } & \begin{array}{l}\text { Replacement } \\\text { Equipment }\end{array}\\\text { Original cost } & \$ 93,000 & \$ 60,000 \\\text { U seful life in years } & 13 & 6 \\\text { Current age in years } & 7 & 0 \\\text { Book value } & \$ 57,000 & - \\\text { Disposal value now } & \$ 45,000 & - \\\text { Disposal value in 6 years } & 0 & 0 \\\text { Annual cash operating costs } & \$ 15,000 & \$ 11,000\end{array}$ Required:
Prepare a cost comparison of all relevant items for the next six years together. Ignore income taxes. Comment on the best alternative for Cyclone Corporation.

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Definitions:

Share

A unit of ownership in a company or financial asset, often traded on a stock exchange.

Arithmetic Average Return

The simple average of a series of returns over a period of time, calculated by summing the returns and dividing by the number of periods.

Jensen's Measure

A performance evaluation measure that calculates the excess return a fund generates over its expected return, given its level of risk.

Risk-Free Return

The theoretical return on an investment with no risk of financial loss, often represented by the yield on government securities such as U.S. Treasury bonds.