A new machine would cost $18,000, have operating costs of $1,000 in the first ye

Question

A new machine would cost $18,000, have operating costs of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year’s operating costs. The salvage value declines each year by 25% for the previous year’s salvage value. The machine has a maximum life of seven years. An overhaul costing $3,000 and $4,500 will be required during the fifth and seventh years of service, respectively. The firm’s required rate of return is 15%. Find the economic service life of this new machine.

Explanation / Answer

Year                   -                      1                    2                    3                    4                    5                    6                    7 New machine cost    18,000.00 operating costs        1,000.00     1,150.00     1,322.50     1,520.88     1,749.01     2,011.36     2,313.06 Salvage value (10,000.00) (7,500.00) (5,625.00) (4,218.75) (3,164.06) (2,373.05) (1,779.79) Overhauling cost     3,000.00     4,500.00 net cost     (9,000.00) (6,350.00) (4,302.50) (2,697.88)     1,584.94       (361.69)     5,033.28 Required rate 15%            0.8696         0.7561         0.6575         0.5718         0.4972         0.4323         0.3759 PV of cost     (7,826.09) (4,801.51) (2,828.96) (1,542.52)         788.00       (156.37)     1,892.19 The economic life of asset is 5 years when the operating cost increases its salvage value

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.