A special-purpose machine is to be purchased at a cost of $30,000. The following table shows the expected annual operating and maintenance cost and the salvage value for each year of service: Year of Service O&M Cost 1 2 3 4 $5,000 $6,500 $10,000 $12,500 $14,800 Market Value $25,800 $16,000 $10,000 $5,000 $0 a) If the interest rate is 12%, what is the economic service life for this machine? b) The old machine (Defender) has remaining life of 3 years The current market value of it is $28,000 and the annual operational cost is $5,500. The value of the old machine is reduced by 5% each year while the operational costs increase by $1000 each year. Determine the economic service life of the old machine at an interest rate of 12%. c) If the old machine is to be replaced with the new machine when is the best time to do so?
A special-purpose machine is to be purchased at a cost of $30,000. The following table shows the expected annual operating and maintenance cost and the salvage value for each year of service: Year of Service O&M Cost 1 2 3 4 $5,000 $6,500 $10,000 $12,500 $14,800 Market Value $25,800 $16,000 $10,000 $5,000 $0 a) If the interest rate is 12%, what is the economic service life for this machine? b) The old machine (Defender) has remaining life of 3 years The current market value of it is $28,000 and the annual operational cost is $5,500. The value of the old machine is reduced by 5% each year while the operational costs increase by $1000 each year. Determine the economic service life of the old machine at an interest rate of 12%. c) If the old machine is to be replaced with the new machine when is the best time to do so?
Chapter1: Making Economics Decisions
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Transcribed Image Text:A special-purpose machine is to be purchased at a cost of $30,000. The following table
shows the expected annual operating and maintenance cost and the salvage value for each
year of service:
Year of Service O&M Cost
1
2
3
4
5
$5,000
$6,500
$10,000
$12,500
$14,800
Market Value
$25,800
$16,000
$10,000
$5,000
$0
a) If the interest rate is 12%, what is the economic service life for this machine?
b) The old machine (Defender) has remaining life of 3 years The current market value of it
is $28,000 and the annual operational cost is $5,500. The value of the old machine is
reduced by 5% each year while the operational costs increase by $1000 each year.
Determine the economic service life of the old machine at an interest rate of 12%.
If the old machine is to be replaced with the new machine when is the best time to do so?
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