Question

An injection molding system has a first cost of $175,000 and an annual operating cost of $95,000 in years 1 and 2, increasing by $6,000 per year thereafter. The salvage value of the system is 25% of the first cost regardless of when the system is retired within its maximum useful life of 5 years. Using a MARR of 11% per year, determine the ESL and the respective AW value of the system.

The ESL is ........ year(s) and AW value of the system is $  .......

Answer 1

All cost calculation are in $.

ESL of the system is the number of year n in which AW value of the system is minimum. AW value of the system is equivalent annual cost of the system ,

Which is equal to the cost of system in total – revnue from the system

Initial cost (P) = $175000 , Salvage value (F) = $ 43,750,

Annual operating and maintenance cost (A) = $ 95,000 , Study period (n) = 5 years.

i=11%

Initial cost future value at the end of 5^th year =   175000 *(1.11)^5

Salvage Value at the end of the year = 43750

Annual Cost assuming it is paid at the end of the each year = Future value of O&M cost at the end of 5^th year =

For cost at the end of first year = 95000*(1.11)^4

For cost at the end of the second year = 95000*(1.11)^3

For cost at the end of the third year = 101000*(1.11)^2

For cost at the end of the fourth year = 107000*(1.11)^1

For cost at the end of fifth year = 113000 =113000

Total future value cost of O&M paid = 630353.73

Future value cost of machine =294885.2

Salvage Value = 43750

AW of the system = 591641.13+294885.2-43750 = $ 881488.93

Thus the system has ESL of 5 year with AW of $881488.93