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 of the new machine. n T CR (896)-LoC(896)--TotalCost (8%) 2 3 12960 3000 3948 4403 4847 5276 4929 4328 4 9332 9175 OPTIMAL n = --

Explanation / Answer

0.301920804

Machine Cost(P) $20000 Operating Cost $3000 in first year increase by $1000 Machine resale cost(s) $8000 in first year decline by 1000 each year MARR (I) 8% Calculation of EUAC due to capital cost EUAC of capital cost = (P-S)*(A/P,I,n)+s*i Year P S P-S PV factor @ 8% EUAC 0 20000 1 20000 8000 12000 1.026666667 12960 2 20000 7000 13000 0.560769231 7850 3 20000 6000 14000 0.388033514 5912.469 4 20000 5000 15000

0.301920804

4928.812 5 20000 4000 16000 0.250456455 4327.303 6 20000 3000 17000 0.216315386 3917.362 Calculation of EUAC operating cost : Operating disbursment is $3000 in first year and expected to increase by $1000 a year So it’s A+G series, where A = $3000 and G = $1000 EUAC of capital cost = (A+G)*(A/P,I,n) Year A G PV factor @ 8% EUAC 0 3000 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 2.276346033 5276.346033 Total EUAC = EUAC of capital + EUAC of operating cost n CR(8%) OC(8%) Total Cost 1 12960 3000 15960 2 7850 3480.8 11330.8 3 5912.469 3948.7 9861.169197 4 4928.812 4404 9332.812067 5 4327.303 4846.5 9173.803273 6 3917.362 5276.346 9193.707599

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