A new server system costs $450,000, plus $50,000 for installation. The server will have a useful...

A new server system costs $450,000, plus $50,000 for installation. The server will have a useful life of 6 years, but you need to know its most economic life. Assume straight line depreciation will result in $150,000 salvage value at the end of 6 years. Installation costs cannot be depreciated. Operating and maintenance costs are expected to be $40,000 the first year, increasing by $15,000 each year thereafter. Your MARR is 8%.

What is EAC (Capital) when n = 4 years?

Expert Solution

Calculation of present value of operating and maintenance Cost :

Year	Operating and maintenance Cost	PV @ 8%	Present value
1	40,000.00	0.9259	37,036.00
2	55,000.00	0.8573	47,151.50
3	70,000.00	0.7938	55,566.00
4	85,000.00	0.735	62,475.00
	Total	202,228.50

	Cost of System	450,000.0000
Add	Installation	50,000.0000
	Initial outlay	500,000.0000
Add	PV of annual operating cost	202,228.5000
Less	Present value of salvage value
	(150000*1/1.08^6)	94,515.0000
		607,713.5000
	PVAF ( 8%,4)	3.3121
	EAC ( Total/PVAF)	183,482.8357

Present value Annuity Factor ( 8%,4) =	1/(1.08)^1 +…………... 1/(1.08)^4
Present valueFactor(8%,n) =	1/(1.08)^n

jeff jeffy answered 2 years ago

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