Question

The company you are working for is considering replacing an old milling machine. Its current salvage value is estimated to $20,150 and that value will decrease by $3,000 per year. Maintenance costs are expected to be $9,500 this coming year and will likely increase by about $125 per year. A minor overhaul costing an extra $2,250 will be required in year 4.

The company’s MARR is 10%. Determine the Economic Life and EAC* of the old milling machine.

Answer 1

Years	O&M Costs	Overhaul Cost	PV @ 10%	PV Cost @10%	Salvage Value	PV @ 10%	NPV @ 10%
1	-9500.00		0.90909	-8636.36	20150.00	18318.18	9681.82
2	-9625.00		0.82645	-7954.55	17150.00	14173.55	6219.01
3	-9750.00		0.75131	-7325.32	14150.00	10631.10	3305.79
4	-9875.00	-2250.00	0.68301	-6744.76	11150.00	7615.60	870.84
5	-10000.00		0.62092	-6209.21	8150.00	5060.51	-1148.70

NPV has turned negative in the 5th year which means the value of economic life lies in between 4th and 5th year.
= 870.84/(870.84+1148.70)
= 0.43

Thus, the economic life is 4.43 years.

Now, the NPV of the cost through its economic lifeis:
=8636.36+7954.55+7325.32+6744.76+6209.21
= 36870.20

Annuity factor for 10% and 4.43 years = 3.444
EAC = 36870.20/3.444
= $10705.63