6. Consider below the Marginal Cost of an existing machine and the Equivalent Uniform Annual Cost Data of buying an new machine. The company's Minimum Attractive Rate of Return is 15%. The existing machine still in use was purchased for $15,000 four years ago. Tablo 60- Marginal cost of an operational widget making machine
6. Consider below the Marginal Cost of an existing machine and the Equivalent Uniform Annual Cost Data of buying an new machine. The company's Minimum Attractive Rate of Return is 15%. The existing machine still in use was purchased for $15,000 four years ago. Tablo 60- Marginal cost of an operational widget making machine
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:6. Consider below the Marginal Cost of an existing machine and the
Equivalent Uniform Annual Cost Data of buying an new machine.
The company's Minimum Attractive Rate of Return is 15%. The
existing machine still in use was purchased for $15,000 four years
ago.
Table 6.0 - Marginal cost of an operational widget making machine
Cost of
Year, n
Loss in Market
Forgone
Value in Year n
Interest in
Year n
$15,000(0.15)
= $2,250
1
2
3
4
5
6
$15,000 - $8,000 =
$7,000
$8,000 - $4,000 =
$4,000
$4,000 - $3,000 =
$1,000
$3,000-$2,000 =
$1,000
Cost ($)
$2,000 - $1,000 =
$1,000
$1,000 - $500 =
$500
0
$8,000(0.15) = $1,100
$1,200
$1,200
$4,000(0.15)
= $600
=
$1,300
$1,500
$1,000(0.15) $1,700
= $150
$3,000(0.15)
= $300
$2,000(0.15)
= $300
O&M
Cost in
Year n
$1,000
Figure 6.0 - EUAC cost against time, for a new widget making machine
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4.000
3,000
2,000
1,000
6
7
Breakdown
Risk in Year n
$0
$500
$1,000
$2,000
$3,000
$4,000
Year
8 9
10
11
Total Marginal
Cost in Year n
$10,250
$6,800
$3,800
$4,600
$5,800
$6,350
Total EUAC
EUAC of Maintenance
and Repair
EUAC of Operating
EUAC of Capital Recovery
12 13
14
15
Should the existing machine continue to be used or replaced? Why
or why not? If it is to be replaced, in what year should it be
replaced?
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