Question

"General Food Company is considering replacing an old food dispenser which was purchased 10 years ago at a cost of $26,000. It has a current market value of $6000. If the firm spends $3000 to recalibrate the dispenser, it would extend the life of the dispenser for another three years with the following estimated market values and operating costs:
Year 0: Market value $6000; Overhaul $3000
Year 1: Market value $4000; O&M cost $3400
Year 2: Market value $2200; O&M cost $5400
Year 3: Market value $1100; O&M cost $7300
The firm`s MARR is 12%. Ignore any income tax effects for this problem. What is the remaining economic service life of the machine with the overhaul? Hint: consider the overhaul as one-time O&M cost in year 0. Enter your answer as an integer between 1 and 3."

Answer is 2

Answer 1

Economic service life is 2 years because EUAC is minimum in year 2

EUAC (N = 1) = (9000 + (3400 - 4000)(P/F, 12%, 1))(A/P, 12%, 1) = 9480

EUAC (N = 2) = (9000 + 3400(P/F, 12%, 1) + (5400 - 2200)(P/F, 12%, 2))(A/P, 12%, 2) = 8630.94

EUAC (N = 3) = (9000 + 3400(P/F, 12%, 1) + 5400(P/F, 12%, 2) + (7300 - 1100)(P/F, 12%, 3))(A/P, 12%, 3) = 8640.94

Year	Annual cost	Salvage value	PV of the annual cost	PV of the market value	Net present value	EUAC
1	3400	4000	3035.71	3571.43	8464.29	9480.00
2	5400	2200	7340.56	1753.83	14586.73	8630.94
3	7300	1100	12536.56	782.96	20753.60	8640.74