A new asset is available for $210,000. O&M; costs are $23,000 each year for the

Question

A new asset is available for $210,000. O&M; costs are $23,000 each year for the first five years, $20,000 in year six, $16,000 in year seven, and S12,000 in year eight. Salvage values are estimated to be $150,000 after one year and will decrease at the rate of 20% per year thereafter. At a MARR of 15%, determine the economic service life of the asset. Click the icon to view the interest factors for discrete compounding when MARR = 15% per year. The economic service life of the asset is 8 year(s) with an AEC value of s 65,835 (Round to the nearest whole number.)

Explanation / Answer

Economic life of a asset can be calculated using annual equated cost ,annual equated cost caluculated for when asset held for 1 year ,2 years , 3 years .......8 years and among the above calculation which have low annual equated cost shall be the economic service life of asset.

Table showing salvage value at different years

Computation of Annual equated cost for different useful life

AEC when asset held for 1 year =99560

AEC when asset held for 2 years=156659/1.6257 AEC=PV of COST/Annuty Factor =96364

when aseet held for 3 years

96000*0.6575

AEC when asset held for 3 years=199394/2.2832=87331

when aseet held for 4 years

AEC when asset held for 4 years=231756/2.8549=81178

5.when aseet held for 5 years

AEC when asset held for 5 years=256551/3.3521=76534

6.when aseet held for 6 years

AEC when asset held for 6 years=274496/3.7844=72534

7.when aseet held for 7 years

AEC when asset held for 7 years=286978/4.1603 =68980

8.when aseet held for 8 years

AEC when asset held for 8 years=295398/4.4872 =65832

CONCLUSION

AEC is less when asset held for 8 years hence economic life of an asset is 8 years.

Year Computation Amount(in$) 1 Given 150000 2 150000*80% 120000 3 150000*80%*80% 96000 4 150000*80%*80%*80% 76800 5 150000*80%*80%*80%*80% 61440 6 150000*80%*80%*80%*80%*80% 49152 7 150000*80%*80%*80%*80%*80%*80% 39321 8 150000*80%*80%*80%*80%*80%*80%*80% 31457

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