30 years ago, the Hamilton Bulldogs, an amateur hockey team, purchased an arena
ID: 2794549 • Letter: 3
Question
30 years ago, the Hamilton Bulldogs, an amateur hockey team, purchased an arena (the defender) from the city of Hamilton for $500,000. Due to the age of the facility, operations and maintenance costs for the next year are $15,000 increasing at 1 % per year. The arena could fetch $400,000 if sold ásis-a price which is expected to increase at a rate of 10% ainually due to: real estate 'speculation. If the. minimum EUAC of a new arena (the challenger) is S100,000 use replacement analysis, to determine if the Buldogs should replace the arena in the next 3 years ifMARRSA LE eng (30 marks) ..Explanation / Answer
1.
Equated Annual Cost, if arena is replaced at the end of 1st year.
Purchase Cost = $500,000
Add: Maintenance Costs = $14,019 ($15,000/1.07)
Less: Recoverable Value = ($373,832) ($400,000/1.07)
Net Cost = $140,187
2.
Equated Annual Cost, if arena is replaced after 2years.
Purchase Cost = $500,000
Add: Maintenance Cost for 1st year = $14,019
Add: Maintenance Cost for 2nd year = $13,233 (($15,000 * 1.01)/(1.07 * 1.07))
Less: Recoverable Value = ($384,313) (($400,000 * 1.1)/(1.07 * 1.07))
Net cost for 2 years = $142,939
Equated Annual Cost per annum = $142,939 / (1.07 * 1.07)
= $124,849.
3.
Equated Annual Cost, if arena is replaced after 3years.
Purchase Cost = $500,000
Add: Maintenance Cost for 1st year = $14,019
Add: Maintenance Cost for 2nd year = $13,233
Add: Maintenance Cost for 3rd year = $12,491 (($15,000 * 1.01 * 1.01)/(1.07 * 1.07 * 1.07))
Less: Recoverable Value = ($395,088) (($400,000 * 1.1 * 1.1)/(1.07 * 1.07 * 1.07))
Net cost for 3 years = $144,655
Equated Annual Cost per annum = $144,655 / (1.07 * 1.07 * 1.07)
= $118,082
Since, equated annual cost is least in the third case, it is advisable to replace the arena at the end of the third year.