3. A company has decided to replace its inspection machine with an advanced one.

Question

3. A company has decided to replace its inspection machine with an advanced one. The advanced machine costs $20,000 and will have operating costs of $3,000 in the first year, increasing by $1,000 per year thereafter. The expected salvage value of the new machine is $8,000 at the end of the first year and will decline by $1000 each year. Find the missing values in the following table and determine the economic life | CR(8%) LOC (8%) Total Cost(896) n 12960 3000 7850 ._ 2 3948 4403 4847 . 5276 4 5 6 9332 9175 4328 OPTIMAL n =

Explanation / Answer

Calculating EUAC for Capital Cost Y P S P-S PV Factor EUAC 0 20000 1 20000 8000 12000 1.03 13000 2 20000 7000 13000 0.56 7840 3 20000 6000 14000 0.38 5800 4 20000 5000 15000 0.3 4900 5 20000 4000 16000 0.25 4320 6 20000 3000 17000 0.22 3980 Calculating EUAC for Operating Cost Operating Cost is $3000 in first year and then increases by $1000 every year Year A G PV factor EUAC 0 1 3000 1000 0 3000 2 3000 1000 0.4808 3480.8 3 3000 1000 0.9487 3948.7 4 3000 1000 1.404 4404 5 3000 1000 1.8465 4846.5 6 3000 1000 2.2201 5220.1 Total EUAC = EUAC of Capital Cost + EUAC of Operating Cost Year Capital EUAC OC EUAC Total EUAC Change in Cost each year 0 1 12960 3000 15960 2 7840 3480.8 11320.8 4639.2 3 5800 3948.7 9748.7 1572.1 4 4900 4404 9304 444.7 5 4320 4846.5 9166.5 137.5 6 3980 5220.1 9200.1 -33.6 Total EUAC will decrease from year 6 Hence Ecnomic Life of 5 years and EUAC is 9166.5

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