A used automobile can be purchased by a student to provide transportation to and
ID: 448314 • Letter: A
Question
A used automobile can be purchased by a student to provide transportation to and from university for $12,000 as-is (i.e. without warranty). First year maintenance cost is expected to be $1,200 and the maintenance costs will increase by $120 per year thereafter. Operation costs for the automobile will be $6,000 for every year the automobile is used and its salvage value decreases by 12 % per year.
What is the economic life without considering the varying value of money over time?
What is the economic life if the rate of interest is 5%?
Explanation / Answer
One time fixed cost of $ 12,000...purchase
Every year costs include $ 6000 for operations
Additional $ 1200 as maintenance cost / per year which will increase by $ 120 every year
Salvage value will decrease by 12% each year.
In this case economic life would be that period of use of this automobile beyond which it would be cheaper to buy a new automobile.
Only cost which increases every year is the maintenance cost and the increase is 1% of the original cost, so it would take 100 cycles before the automobile can be replaced.
Hence the economic life without considering the varying value of money is 101 years
If the ROI is 5 % the economic life still remains the same because only one cost is varying over the years.
Please find below the excel working, I have hidden the middle cells as the entire calculation is too lengthy to fit in one single image.
Year Automobile cost Maintenance cost Operations Cost Salvage value MARR Total Cost New auto cost New Maintenance cost New Operations Cost New Total Cost -12000 1 -1200 -6000 10560 1.05 -6857 -12000 -1200 -6000 -8228.57 2 -1320 -6000 9292.8 1.103 -6639 -12000 -1200 -6000 -8986.12 3 -1440 -6000 8177.66 1.158 -6427 -12000 -1200 -6000 -9521.51 4 -1560 -6000 7196.34 1.216 -6220 -12000 -1200 -6000 -9875.44 5 -1680 -6000 6332.78 1.276 -6017 -12000 -1200 -6000 -10081.8 6 -1800 -6000 5572.85 1.34 -5820 -12000 -1200 -6000 -10168.8 7 -1920 -6000 4904.11 1.407 -5629 -12000 -1200 -6000 -10159.8 8 -2040 -6000 4315.61 1.477 -5442 -12000 -1200 -6000 -10074.3 9 -2160 -6000 3797.74 1.551 -5260 -12000 -1200 -6000 -9928.43 95 -12480 -5945 0.06383 103 -178.8 -12000 -1200 -6000 -186.344 96 -12600 -5944 0.05617 108.2 -171.4 -12000 -1200 -6000 -177.471 97 -12720 -5943 0.04943 113.6 -164.3 -12000 -1200 -6000 -169.02 98 -12840 -5942 0.0435 119.3 -157.5 -12000 -1200 -6000 -160.971 99 -12960 -5941 0.03828 125.2 -150.9 -12000 -1200 -6000 -153.306 100 -13080 -5940 0.03369 131.5 -144.6 -12000 -1200 -6000 -146.006 101 -13200 -5940 0.02964 138.1 -138.6 -12000 -1200 -6000 -139.053 102 -13320 -5940 0.02609 145 -132.8 -12000 -1200 -6000 -132.432 103 -13440 -5940 0.02296 152.2 -127.3 -12000 -1200 -6000 -126.126Related Questions
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