Question

Please assist if familiar with economics. thanks.

An equipment has an initial cost of $20,000 and a useful life of 7 years. Each year the equipment decreases in value by 15%. The operating and maintenance cost is $1200 the first year and increases thereafter by $1000. Additionally, it has a breakdown cost of $2500 the first year and increases by $1500 henceforth. Create a table to display all necessary costs and show the annual marginal cost. Interest rate is 10%.

Answer 1

Marginal cost = Loss in market value + Forgone interest + O&M cost + Breakdown cost

Year	Salvage	Loss in market value	Forgone interest	O&M cost	Breakdown	Total MC
0	20000.00
1	17000.00	3000.00	2000.00	1200.00	2500.00	8700.00
2	14450.00	2550.00	1700.00	2200.00	4000.00	10450.00
3	12282.50	2167.50	1445.00	3200.00	5500.00	12312.50
4	10440.13	1842.38	1228.25	4200.00	7000.00	14270.63
5	8874.11	1566.02	1044.01	5200.00	8500.00	16310.03
6	7542.99	1331.12	887.41	6200.00	10000.00	18418.53
7	6411.54	1131.45	754.30	7200.00	11500.00	20585.75

Showing work in Excel

Year	Salvage	Loss in market value	Forgone interest	O&M cost	Breakdown	Total MC
0	20000
1	=20000*0.85	=O13-O14	=O13*0.1	=1200	2500	=P14+Q14+R14+S14
2	=O14*0.85	=O14-O15	=O14*0.1	=R14+1000	=S14+1500	=P15+Q15+R15+S15
3	=O15*0.85	=O15-O16	=O15*0.1	=R15+1000	=S15+1500	=P16+Q16+R16+S16
4	=O16*0.85	=O16-O17	=O16*0.1	=R16+1000	=S16+1500	=P17+Q17+R17+S17
5	=O17*0.85	=O17-O18	=O17*0.1	=R17+1000	=S17+1500	=P18+Q18+R18+S18
6	=O18*0.85	=O18-O19	=O18*0.1	=R18+1000	=S18+1500	=P19+Q19+R19+S19
7	=O19*0.85	=O19-O20	=O19*0.1	=R19+1000	=S19+1500	=P20+Q20+R20+S20