A special-purpose 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: Year of Service O&M Cost 1 2 3 4 $5,000 $6,500 $10,000 $12,500 $14,800 Market Value $25,800 $16,000 $10,000 $5,000 $0 a) If the interest rate is 12%, what is the economic service life for this machine? b) The old machine (Defender) has remaining life of 3 years The current market value of it is $28,000 and the annual operational cost is $5,500. The value of the old machine is reduced by 5% each year while the operational costs increase by $1000 each year. Determine the economic service life of the old machine at an interest rate of 12%. c) If the old machine is to be replaced with the new machine when is the best time to do so?

A special-purpose 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: Year of Service O&M Cost 1 2 3 4 $5,000 $6,500 $10,000 $12,500 $14,800 Market Value $25,800 $16,000 $10,000 $5,000 $0 a) If the interest rate is 12%, what is the economic service life for this machine? b) The old machine (Defender) has remaining life of 3 years The current market value of it is $28,000 and the annual operational cost is $5,500. The value of the old machine is reduced by 5% each year while the operational costs increase by $1000 each year. Determine the economic service life of the old machine at an interest rate of 12%. c) If the old machine is to be replaced with the new machine when is the best time to do so?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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