Question

A machine cost $200,000 and has a salvage value of $100,000 if kept for one year. The salvage value will decrease by $50,000 in years 2 and 3 and remain zero after year 3. The operating costs are $50,000 the first year and increase by $50,000 per year. So operating costs in year two will be $100,000, and in year three $150,000 and so on. How long should the equipment be kept so that annual cost is minimized if the MARR is 10%/year compounded annually or stated another way what is the economic service life (ESL) and what is the associated annual cost for this service life?

Answer 1

ESL is two years with $130,165 as the annual cost for this duration. Pls see table below for calculations.

	A	B (decrease in salvage value)	C (given)	D = B+C	D/(1.1^Time)	(sum of D for period 1 to n) / n
Time	Purchase price	Loss in value	Operating cost	Total cost	Discounted	Average annual cost
0	200000
1		100000	50000	150000	136364	136364
2		50000	100000	150000	123967	130165
3		50000	150000	200000	150263	136865
4		0	200000	200000	136603	136799
5		0	250000	250000	155230	140485
6		0	300000	300000	169342	145295

answered by: anonymous