Ross System received a price quote for a CNC router for a cost of $50,000. The o

Question

Ross System received a price quote for a CNC router for a cost of $50,000. The operation and maintenance cost is expected to be about $2,000 per year. Salvage value is expected to be zero when the machine is retired. Since it is a machine based on a new design, the life is expected to vary from 4 to 7 years with associated probabilities as shown below. If the interest rate is 12%, what is the expected EUAC for this router? Life in years - 4 5 6 7 Probability - .1 .2 .4 .3 A. 16,460 B.15,970 C.13,160 D.14,391

Explanation / Answer

We have EUAC = 50000(A/P,12%,N) + 2000 where N varies from 4 to 7
For N=4, EUAC(4) = 50000*0.3292+2000 = 18460
For N=5, EUAC(5) = 50000*0.2774+2000 =15870
For N=6, EUAC(6) = 50000*0.2432+2000 =14160
For N=7, EUAC(7) = 50000*0.2191+2000 = 12955

SO EUAC = 0.1*18460+0.2*15870+0.4*14160+0.3*12955 =14391 ....Ans (D)

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