Question

Question 8 Milliken uses a digitally controlled dyer for placing intricate patterns on manufactured carpet squares for home and commercial use. It is purchased for $400,000. Its market value will be $310,000 at the end of the 1st year and drop by $46,000 per year thereafter to a minimum of $30,000. Operating costs are $20,000 the 1st year, increasing by 8% per year. Maintenance costs are only $8,000 the 1st year but will increase by 35% each year thereafter. Milliken's MARR is 20%. Determine the optimum replacement interval for the dyer. Year(s)

Answer 1

The answer is 4 years

The cost of the dyer = $400,000

Year	Resale value (S)	Purchase price resale value (Cost-ReSale value)}	Operating cost (Increasing rate@8%)		Maintainence cost		TOTAL RUNNING COSTS	Cumulative RUNNING COSTS	TOTAL COSTS(Purchase resale price + cumulative running costs)	Average annual cost
		(a)	Calculation	Amount (b)	Calculation	Amount (c)	(a)+(b)	(d)	(a)+(d)	(total cost/YEAR)
1	310,000.00	90,000.00	20000	20,000.00	8000	8,000.00	28,000.00	28,000.00	118,000.00	118,000.00
2	264,000.00	136,000.00	20000+8%	21,600.00	8000+35%	10,800.00	32,400.00	60,400.00	196,400.00	98,200.00
3	218,000.00	182,000.00	21600+8%	23,328.00	10800+35%	14,580.00	37,908.00	98,308.00	280,308.00	93,436.00
4	172,000.00	228,000.00	23328+8%	25,194.24	14580+35%	19,683.00	44,877.24	143,185.24	371,185.24	92,796.31
5	126,000.00	274,000.00	25194.24+8%	27,209.78	19683+35%	26,572.05	53,781.83	196,967.07	470,967.07	94,193.41
6	80,000.00	320,000.00	27209.78+8%	29,386.56	26572.05+35%	35,872.27	65,258.83	262,225.90	582,225.90	97,037.65
7	34,000.00	366,000.00	29386.56+8%	31,737.49	35872.27+35%	48,427.56	80,165.05	342,390.95	708,390.95	101,198.71
8	30,000.00	370,000.00	31737.49+8%	34,276.49	48427.56+35%	65,377.21	99,653.69	442,044.64	812,044.64	101,505.58

The annual average cost is minimum at the end of year 4. so the optimum replacement interval for the dyer is 4 years of use.