Question
In: Economics
The company you are working for is considering replacing an old milling machine. Its current salvage...
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.
Solutions
Expert Solution
| 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
Rahul Sunny answered 2 years agoRelated Solutions
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