"A special-purpose machine is to be purchased at a cost of $18,000. The expected annual operating...

"A special-purpose machine is to be purchased at a cost of $18,000. The expected annual operating and maintenance cost and the salvage (or market) values for each year of the machine's service are as follows.
Year of service 1; O&M costs $2200; Market value $14,400
Years of service 2; O&M costs $3300; Market value $11,100
Years of service 3; O&M costs $4000; Market value $5,700
Years of service 4; O&M costs $5500; Market value $3,000
Years of service 5; O&M costs $6100; Market value $0
If the interest rate is 13%, what is the economic service life for this machine? Enter your answer as an integer between 1 and 5."

Answer is 1

Expert Solution

The economic service life is defined as that year in which the annual worth of costs are lowest.

	$ 18,000.00		13%
Year	Salvage Value	Annual Cost	AWC
1	$ 14,400.00	2200	$8,140.00
2	$ 11,100.00	3300	$8,295.87
3	$ 5,700.00	4000	$9,043.51
4	$ 3,000.00	5500	$9,022.37
5	$ -	6100	$9,094.53


AWC = Annual worth of costs
Ecominc life is 1 year only since the annual worth of costs is lowest in year 1 and this increases from year 2 onwards

The excel screen shot with formula is as shown below:

jeff jeffy answered 2 years ago

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