Question

Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $230,000 and has operating cost of $25,000 in the first year. For the remaining years, operating costs increase each year by 5% over the previous year’s operating costs. It loses 15% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 4 years. The firm’s required rate of return is 5%. Find the economic service life of this new machine.

Answer 1

							Rough
Life	Salvage Value	Operating cost	Operating cost cumulative	Cumulative PV @ 5%	Annual worth		0	1
(a)	(b)	(c )	(d)	(e)	(f=(b-d)/e)
1	1,72,500	25,000	25,000	0.95	1,54,875		1	0.952381	0.952381
2	1,46,625	26,250	51,250	1.86	51,293		2	0.907029	1.85941
3	1,24,631	27,563	78,813	2.72	16,825		3	0.863838	2.723248
4	1,05,937	28,941	1,07,753	3.55	-512		4	0.822702	3.545951
First year is the economic service life for this machine as having best annual worth basis
Notes:
1) Salvage value at 1st year end (230000 - (230000/4)) = $ 1,72,500