An equipment cost $80,000 initially. The market value has been declining at the rate of $15,000...

An equipment cost $80,000 initially. The market value has been declining at the rate of $15,000 yearly. The O & M (Operating & Maintenance) costs in year 1 were $10,000 and have been increasing by $2,000 from year 2. Determine the minimum cost life of this equipment for a MARR of 10%. (A) 2 years (B) 1 Year (C) 4 Years (D) 5 Years

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Expert Solution

Using excel for economic life analysis

Year	Discount factor	O&M cost	PV (O&M)	Cumulative (O&M)	Cumulative (O&M) + Initial Cost	Salvage value	PV (Salvage value)	NPV	(A/P,10%,n)	EUAC
A	B	C	*D=CB**	E	F=E+80000	G	*H=GB**	I=F-H	J	*K = IJ**
1	0.90909	10000.00	9090.91	9090.91	89090.91	65000.00	59090.91	30000.00	1.10000	33000.00
2	0.82645	12000.00	9917.36	19008.26	99008.26	50000.00	41322.31	57685.95	0.57619	33238.10
3	0.75131	14000.00	10518.41	29526.67	109526.67	35000.00	26296.02	83230.65	0.40211	33468.28
4	0.68301	16000.00	10928.22	40454.89	120454.89	20000.00	13660.27	106794.62	0.31547	33690.58
5	0.62092	18000.00	11176.58	51631.47	131631.47	5000.00	3104.61	128526.86	0.26380	33905.06
Discount factor	1/(1+0.1)^n
(A/P,i,n)	i((1 + i)^n)/((1 + i)^n-1)

Minimum EUAC is 33000 at 1 yrs

so economic life is 1 yr

Rahul Sunny answered 1 year ago

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