Question

Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $3000000 and has operating cost of $50500 in the first year. For the remaining years, operating costs increase each year by 35% over the previous year’s operating costs. It loses 7% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 6 years. The firm’s required rate of return is 5%. Find the economic service life of this new machine.

Answer 1

End of year	O&M at end of year	P/F, 5%,n	Present worth as of beginning	Summation of Present worth of	Present worth of cumulative	A/P, 5%,n	Average equivalent annual costs
			of year 1 of O&M expenses	O&M costs through year given	maintenance cost & first cost		through year given
A	B	C	D = B*C	E	F = E+3000000	G	H = F* G
1	50,500.00	0.9524	48,095.24	48,095.24	3,048,095.24	1.0500	3,200,500.00
2	68,175.00	0.9070	61,836.73	109,931.97	3,109,931.97	0.5378	1,672,521.41
3	92,036.25	0.8638	79,504.37	189,436.35	3,189,436.35	0.3673	1,171,479.97
4	124,248.94	0.8227	102,219.91	291,656.25	3,291,656.25	0.2820	928,247.06
5	167,736.07	0.7835	131,425.60	423,081.85	3,423,081.85	0.1728	591,508.54	LEAST
6	226,443.69	0.7462	168,975.77	592,057.62	3,592,057.62	0.1971	707,994.56
	So, economic service life of the machine = 5 years.   please rate my answer well. thanks.