6. The Gooey Glue Co. production manager purchased a stainless steel mixing tank

Question

6. The Gooey Glue Co. production manager purchased a stainless steel mixing tank at auction for $15,000. Because it was a good deal, she estimates the tank can be sold at any time for the purchase price of $15,000, even if the mixer machinery isn’t working. The machinery needs $2000 in repairs now and is expected to cost $500 during the next year to operate. It seems likely that this cost will increase by another $500 ever year for the next few years. What is the optimum economic service life that can be used in a replacement analysis based on a 15% per year MARR?

Explanation / Answer

Find the annual equiavlent cost for the tank for n = 1, 2, 3 ...

AE(n = 1) = 17000(A/P, 15%,1) - 15000(A/F, 15%, 1) + 500 + 500(A/G, 15%, 1)

= 17000*1.15 - 15000*1 + 500 + 0

= 5050

AE(n = 2) = 17000(A/P, 15%,2) - 15000(A/F, 15%, 2) + 500 + 500(A/G, 15%, 2)

= 17000*0.6151 - 15000*0.4651 + 500 + 500*0.4651

= 4241.75

Do this for 10 years and see that the minimum annual equivalent is achived in the 3rd year. Hence its economic life is 3 year.

EOY OC SV Annual equivalent cost 0 0 1 500 15000 5050.0 2 1000 15000 4212.8 3 1500 15000 4079.5 4 2000 15000 4113.7 5 2500 15000 4208.0 6 3000 15000 4327.1 7 3500 15000 4455.6 8 4000 15000 4586.4 9 4500 15000 4715.3 10 5000 15000 4840.1

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