Question

Determine the ESL, at i = 15% per year for equipment that has a first cost of $11,000 and the estimated operating costs and year-end salvage values shown below

Operation Cost Salvage Value

Year $ per Year   $

1 -1000 7000

2 -1200 5000

3 -1300 4500

4. -2100 2000

Answer 1

The economic life is 3 years because EUAC is minimum in 3rd year at 4674.48

This is found by

First find the PV of annual cost and market value

Then use NPV = 11000 + PV of annual cost – PV of market value

Finally use EUAC = (A/P, 15%, n)*NPV

Year	Annual cost	Salvage value	PV of the annual cost	PV of the market value	Net present value	EUAC
1	1000	7000	869.57	6086.96	5782.61	6650.00
2	1200	5000	1776.94	3780.72	8996.22	5533.72
3	1300	4500	2631.71	2958.82	10672.89	4674.48
4	2100	2000	3832.39	1143.51	13688.88	4794.74