A gas turbine purchased two years ago, has its market value as of now to be $260

Question

A gas turbine purchased two years ago, has its market value as of now to be $260,000 and may be used for another 3 years. Its salvage value which decreases by 15% per year, is described by the equation S = 260000 (1 - 0.15)n. The annual operating cost of the turbine will be constant at $90000. A challenger will cost $130,000 with an economic life of 6 years and an operating cost of $100,000 per year. Its salvage value will be $45,000. On the basis of these estimates and at an interest rate of 12% per year, what is the:

Economic service life (ESL) of the defender?

what market value for the existing asset will render the challenger equally attractive

Explanation / Answer

Particulars Defender Challenger Year Particulars Cash Flow PV Factor PV of Cashflow Cash Flow PV Factor PV of Cashflow 0 Investment 1                            -   -130000 1               -1,30,000 1 Operating Costs -90000 0.892857                 -80,357 -100000 0.892857                   -89,286 2 -90000 0.797194                 -71,747 -100000 0.797194                   -79,719 3 -90000 0.71178                 -64,060 -100000 0.71178                   -71,178 4 -90000 0.635518                 -57,197 -100000 0.635518                   -63,552 5 -90000 0.567427                 -51,068 -100000 0.567427                   -56,743 6 -90000 0.506631                 -45,597 -100000 0.506631                   -50,663 6 Salvage Value 98058.87 0.506631                   49,680 45000 0.506631                     22,798             -3,20,347               -5,18,342 Since The Net Cost of 1st Machine is less and it is economical to continue with it

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