The Gooey Glue Co. production manager purchased a stainless steel mixing tank at

Question

The Gooey Glue Co. production manager purchased a stainless steel mixing tank at auction for $15,000. Because it was a good deal, she estimates the tank can be sold at any time for the purchase price of $15,000, even if the mixer machinery isn’t working. The machinery needs $2000 in repairs now and is expected to cost $500 during the next year to operate. It seems likely that this cost will increase by another $500 ever year for the next few years. What is the optimum economic service life that can be used in a replacement analysis based on a 15% per year MARR?

Explanation / Answer

In absence of taxes,

Capital recovery = (MVk-1 – MVk) + r*MVk-1

Marginal cost = Capital recovery + O&M Cost

For three years, EUAC reaches to minimum 4,079.52 and thereafter, starts increasing.

Economic service life = 3 years

EUAC can be find as

5050/1.15 + 3250/1.15^2 + 3750/1.15^3 = EUAC/1.15 + EUAC/1.15^2 + EUAC/1.15^3

5050/1.15 + 3250/1.15^2 + 3750/1.15^3 = (EUAC/0.15)*(1 – 1/1.15^3)

# Market value (MV) Capital recovery O & M Marginal cost EUAC 0 17,000 1 15,000 4550 500 5050 5,050.00 2 15,000 2250 1000 3250 4,212.79 3 15,000 2250 1500 3750 4,079.52 4 15,000 2250 2000 4250 4,113.66 5 15,000 2250 2500 4750 4,208.04

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