A new asset is available for $227,000. O&M costs are $34,000 each year for the first...

A new asset is available for $227,000. O&M costs are $34,000 each year for the first five years, $51,000 in year six, $79,100 in year seven, and $121,800 in year eight. Salvage values are estimated to be $204,000 after one year and will decrease at the rate of 50% per year thereafter. At a MARR of 18%, determine the economic service life of the asset. Enter your answer as an integer from 1 to 8

Expert Solution

Particulars	Year
Figures in $	0	1	2	3	4	5	6	7	8
Asset Purchased (Outflow)	227000	0	0	0	0	0	0	0	0
O & M (Note-2) (Outflow)	0	34000	34000	34000	34000	34000	51000	79100	121800
Present Value of O & M expense	0	28813	53231	73925	91462	106323.8	125215.8	146046	178450
Salvage value	0	204000	102000	51000	25500	12750	6375	3187.5	1593.75
Present Value of Salvage value (Inflow)	0	172881	73254.81	31040	13152	5573.14	2361.5	1000.63	424
Net Ouflow at 0 year (Outflow - Inflow)	0	-82932	-206976	-269885	-305310	-327751	-349854	-372045	-405026

Note-1
Formula for Present value is as below
PV= 1/(1+r)n

Note -2 : Since O & M is recurring cost till 8th year hence cumulative present value taken, for example PV of 2nd year O &M expense is $24418.27, however O & M is recurring cost hence while calculating present value of 2nd year we need to add on PV of 1st year also, and so on till 8th year.

jeff jeffy answered 2 years ago

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