1) A machine is to be purchased at a cost of $30,000. The following table shows
ID: 2581788 • Letter: 1
Question
1) A machine is to be purchased at a cost of $30,000. The following table shows the expected annual operating and maintenance cost and the salvage value for each year of service: If the interest rate is 12%, what is the economic service life for the machine?
Year of Service
O & M Cost
Market Value
1
$5,000
$25,800
2
$6,500
$16,000
3
$10,000
$10,000
4
$12,500
$5,000
5
$14,800
0
Year of Service
O & M Cost
Market Value
1
$5,000
$25,800
2
$6,500
$16,000
3
$10,000
$10,000
4
$12,500
$5,000
5
$14,800
0
Explanation / Answer
End of year 1
CR(i) = (30000 - 25800) * (A/P,12,1) + (25800 * 0.12) + 5000 = 12800
End of year 2
CR(i) = (30000 - 16000) * (A/P,12,2) + (16000 * 0.12) + 5000 +1500 (A/G,12,2) = 25677
End of year 3
CR(i) = (30000 - 10000) * (A/P,12,3) + (10000 * 0.12) + 5000 +3500 (A/G,12,3) = 36790
End of year 4
CR(i) = (30000 - 5000) * (A/P,12,4) + (5000 * 0.12) + 5000 +2500 (A/G,12,4) = 46527
Since CR(i) is minimum at end of year 1, economic service life is 1 year
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