end ofS Years inflation annually is 10%. Release value will also appreciate at 5

Question

end ofS Years inflation annually is 10%. Release value will also appreciate at 5% yearly. A device that monitors rotational vibration changes in turbines may be purchased for use in llocos Norte wind farms. The first cost is Php 400,000 with a constant AOC of Php 150,000 over a maximum service period of 4 years only. Use the decreasing future market values and i-20% per year to find the best n value for an economic eva?uation 4 After k years of 1 service Estimated market Php 320,000 300,000 240,000 200,000 110,000 0 value is

Explanation / Answer

Solution:

The machine has a maximum service period of 4 years. After that farms has to purchase a new machine which will be more costly. So, future worth for the 4 years period analysis is enough.

Future worth for the n years of services is as below:

Given,

First Cost= 400000

Annual operating cost= 150000

Useful life= 4 years

I= 20%

For n=1 , estimated salvage value = 320000

FW1= -400000(F/P, 20%, 1) - 150000(F/A, 20%, 1) + 320000

=-400000(1.2) – 150000 (1) + 320000 = -310000

For n=2 , estimated salvage value = 300000

FW1= -400000(F/P, 20%, 2) - 150000(F/A, 20%, 2) + 300000

=-400000(1.44) – 150000 (2.2) + 300000 = -606000

For n=3 , estimated salvage value = 240000

FW1= -400000(F/P, 20%, 3) - 150000(F/A, 20%, 3) + 240000

=-400000(1.728) – 150000 (3.64) + 240000 = -997200

For n=4 , estimated salvage value = 200000

FW1= -400000(F/P, 20%, 4) - 150000(F/A, 20%, 4) + 200000

=-400000(1.2) – 150000 (5.368) + 200000 = -1434640

So, n=1 is the better value among the given options.

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