Suppose a company has a forklift but is considering purchasing a new electric-lift truck that would cost $18,000, have operating costs 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. The lift truck has a maximum life of three years. The firm's required rate of return is 15%. Find the economic service life of this new machine.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose a company has a forklift but is considering purchasing a new electric-lift
truck that would cost $18,000, have operating costs 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. The lift truck has a maximum life of three years. The firm's
required rate of return is 15%. Find the economic service life of this new machine.
Transcribed Image Text:Suppose a company has a forklift but is considering purchasing a new electric-lift truck that would cost $18,000, have operating costs 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. The lift truck has a maximum life of three years. The firm's required rate of return is 15%. Find the economic service life of this new machine.
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