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