Year 1 Year 2 Year 3 Year 4 O&M costs $35,000 $35,000 $35,000 $35,000 Market value $75,000 $60,000 $50,000 $45,000 Marginal costs: Year 1 Year 2 Year 3 Year 4 O&M $35,000 $35,000 $35,000 $35,000 $15,000 $15,000 $10,000 $5,000 Depreciation Int. on capital $13,500 $11,250 $9,000 $7,500

Year 1 Year 2 Year 3 Year 4 O&M costs $35,000 $35,000 $35,000 $35,000 Market value $75,000 $60,000 $50,000 $45,000 Marginal costs: Year 1 Year 2 Year 3 Year 4 O&M $35,000 $35,000 $35,000 $35,000 $15,000 $15,000 $10,000 $5,000 Depreciation Int. on capital $13,500 $11,250 $9,000 $7,500

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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Question

Finding the Economic Life of the New
CNC Machine. Find TC and EUAC for each year.

Year 1
Year 2
Year 3
Year 4
O&M costs
$35,000 $35,000 $35,000 $35,000
Market value
$75,000 $60,000 $50,000 $45,000
Marginal costs:
Year 1
Year 2
Year 3
Year 4
O&M
$35,000 $35,000 $35,000 $35,000
$15,000 $15,000 $10,000
$5,000
Depreciation
Int. on capital
$13,500 $11,250 $9,000
$7,500

Expert Solution

Step 1

ANSWER

The economic life of the the defender is often 1 year so a proper analysis may be between different lived alternatives. The defender may be kept longer than it is apparent economic life as long as it is marginal cost is less than the minimum EUAC of the Challenger over its economic life.

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