Question

Tri-County Root Beer Co. is considering replacing its current brewing tank. The new tank may be purchased today for $10,000 and may last up to six years.  The operating cost of the new tank will be $2000 in the first year, increasing by $1100 each year.  Meanwhile, the salvage value of the tank will decrease by 30% each year.  If the company MARR is 15%, determine the minimum cost life of the new tank (or what is the useful life which will provide the minimum annual cost).

Answer 1

MARR = 15%

Economic service life analysis

Year	Discount factor	O&M cost	PV (O&M)	Cumulative (O&M)	Cumulative (O&M) + Initial Cost	Salvage value	PV (Salvage value)	NPV	(A/P,15%,n)	EUAC
A	B	C	D=C*B	E	F=E+10000	G	H=G*B	I=F-H	J	K = I*J
1	0.86957	2000.00	1739.13	1739.13	11739.13	7000.00	6086.96	5652.17	1.15000	6500.00
2	0.75614	3100.00	2344.05	4083.18	14083.18	4900.00	3705.10	10378.07	0.61512	6383.72
3	0.65752	4200.00	2761.57	6844.74	16844.74	3430.00	2255.28	14589.46	0.43798	6389.85
4	0.57175	5300.00	3030.29	9875.04	19875.04	2401.00	1372.78	18502.26	0.35027	6480.70
5	0.49718	6400.00	3181.93	13056.97	23056.97	1680.70	835.60	22221.36	0.29832	6628.98
6	0.43233	7500.00	3242.46	16299.42	26299.42	1176.49	508.63	25790.80	0.26424	6814.88
Discount factor	1/(1+0.15)^n
(A/P,i,n)	i((1 + i)^n)/((1 + i)^n-1)

Minimum EUAC is in 2nd year, Minimum EUAC = 6383.72

Economic service life = 2 yrs