A company considers buying a new electric forklift truck that would cost $18,000, having operating cost of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year’s operating costs. Similarly, the salvage value declines each year by 25% from the previous year’s salvage value. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh year of service, respectively. The firm’s required rate of return is 10%.Find the economic service life of this new machine.
A company considers buying a new electric forklift truck that would cost $18,000, having operating cost of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year’s operating costs. Similarly, the salvage value declines each year by 25% from the previous year’s salvage value. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh year of service, respectively. The firm’s required rate of return is 10%.Find the economic service life of this new machine.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 3P
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A company considers buying a new electric forklift truck that would cost $18,000, having operating cost of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year’s operating costs. Similarly, the salvage value declines each year by 25% from the previous year’s salvage value. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh year of service, respectively. The firm’s required
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