Reference no: EM132022231

Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $11,000 per year. Alternative A is to keep the existing auger, which has a current market value of $12,500. It will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $44,000 and will have a $10,000 salvage value after 7 years. O&M costs are $6,500 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a ‘‘treated auger’’ that requires vastly less O&M cost at only $2,000 per year. It costs $68,000, and the trade-in allowance for the existing auger is $16,000. The ‘‘treated auger’’ will have an $18,000 salvage value after 7 years. Alternative D is to sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retainer payment of $7,500. End-of-year O&M cost would be $6,500. MARR is 15%, and the planning horizon is 7 years.