Determining the economic life of an asset. James Bond has just purshased a four-

Question

Determining the economic life of an asset. James Bond has just purshased a four-year-old used car, paying $3,000 for it. A friend has suggested that he determine in advance how long he should keep the car so as to ensure the greatest overall economy. James Bond has decided that, because of style changes, he would not want to keep the car longer than four years, and he has estimated the annual expenses and market values for the next four years as follows: Year (Year 2Year 3Year 4 Annual Expenses $950 $1.051:61.10011.550 Market Value at end of the yeat2.250 1.800 1.450 1.160 If James Bond use an MARR=12% , at the end of which year should he dispose of the car?

Explanation / Answer

Expense 950 1050 1100 1550 Market value 2250 1800 1450 1160 Depreciation 1750 450 350 290 TOTAL EXP 2700 1500 1450 1840 PVF@12% 0.892857 0.797194 0.71178 0.635518 PV 2410.714 1195.791 1032.081 1169.353 THE PV OF EXPENSES IS AT MINIMUM AT THE END OF 3 YEARS AND THEN INCREASING. THE CAR SHALL BE REPLACED AT THE END OF 3RD YEAR.

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