Question

A new forklift truck would cost $22,000, have operating costs of $1200 in the first year, and has a resale value that decreases at 40% per year, every year. For the remaining years, operating costs increase each year by $500 over the previous year’s operating costs. The lift truck has a maximum life of 5 years. An overhaul costing $3,000 would be required in its fourth year. The firm’s MARR is 15%. The AEC_N* (the AEC at the ESL) for the machine is within $50 of

a)	13,300
b)	11,281
c)	9921
d)	9600
e)	8882
f)	8781
g)	8370
h)	None of the above

Answer 1

Answer is option e )$8882

Present value of Cash outflows are as follows

1.Cost of new forklift truck incurred on Day 1=$22,000

2.Operating costs :

Year End	Operating Costs	Disc. Factor (@15%)	Present Value
1	$1200	0.8696	$1,044
2	$1700	0.7561	$1,285
3	$2200	0.6575	$1,447
4	$2700	0.5718	,$1,544
5	$3200	0.4972	$1,591
Total			$6,911

3.Overhauling costs incurred at the end of 4th year=$3,000*0.5718(Disc. Factor of 4th year @15%)=$1715

Salvage value realised at end of maximum life if truck i.e. 5th year=$1,710(Refer WN)

Present value of such cash inflow =$1,710*0.4972=$851

Present Value of Net cash outflows for entire life of machine

=$29,774-$851=$29,775

AEC_{​​​​N*}=Present Valueof net Cash outflows/PVAF

=29,775/3.3522

=$8,882

Working Note of Salvage value:

Year End	Salvage value to be decreased by 40%
1	$22,000-40%=$13,200
2	$13,200-40%=$7920
3	$7920-40%=$4752
4	$4752-40%=$2851
5	$2,852-40%=$1,710