Question

13-30

A $25,000 machine that has been used for one year has a salvage value of $16,000 now, which will drop by $4,000 per year. The maintenance costs for the next 4 years are $1,250, $1,450, $1,750 and $2,250. When the machine is sold, it will cost $2,000 to remove and sell. When machine was purchased, the estimated salvage in 5 years was $3,500. What is the marginal cost for each year?

Answer #1

**Solution:**

**given**

There is a decrease of salvage value by 3500 for each year of the operation, so indirectly it is like an oppurtunity cost per year of using the asset.

**Decrease in income = Cost to the firm.**

Marginal cost = Total Maintenance cost for n years - Total Maintenance cost for n - 1 years. + 4000

However in the question the **maintenance cost is
given** for each of the years, so it is directly the
marginal cost for an additional year of operating the machine.

**Hence the marginal costs for each year are:**

Year = 1....................1250 + 4000 = 5250

Year = 2 ..................1450 + 4000 = 5450

Year = 3 ..................1750 + 4000 = 5750

Year = 4 ................ 2250 + 4000 = 6250

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