Question

A small warehousing company is planning to buy a new forklift today to replace an existing one. The purchase price of the new forklift is $30,000. Each year the new forklift is operated, you will incur operating and maintenance (O&M) costs which are provided in the table below. The new forklift follows a declining balance depreciation model. The salvage values after the first year are estimated to be $22,500. The company uses a MARR of 10% for all financial analysis.

Please show all the work on EAC calculations.

A small warehousing company is planning to buy a new forklift today to replace an existing one. The purchase price of the new forklift is $30,000. Each year the new forklift is operated, you will incur operating and maintenance (O&M) cost which are provided in the table below. The new forklift follows a declining balance depreciation model. The salvage values after the first year is estimated to be $22,500. The company uses a MARR of 10% for all financial analysis. Year End O&M $3 000 $ 4 000 $5 620 $9 000 UD $13 000 A. Determine the depreciation rate of the forklift. B. What is the Economic Life of the forklift, and what is the minimum Equivalent Annual Cost (EAC)? Show ALL your calculations to justify your answer.

Answer 1

Answers

A. Depreciation Rate For the forklift = {($30,000 - $22,500)/$30,000}*100

= 25%.

B. 1. Economic life of forklift is 5 years ( given)

B.2. Minimum Equivalent Annual cost

   Equivalent annual cost (EAC) is the annual cost of owning and maintaining an asset determined by dividing the net present value of the asset purchase, operations and maintenance cost by the present value of annuity factor.

PV of O&M

Years	O&M in $	Annuity Factor@10%	Pv of O&M in$
1	3,000	0.909	2,727
2	4,000	0.826	3,304
3	5,620	0.751	4,221
4	9,000	0.683	6,147
5	13,000	0.621	8,073
Total	34,620	3.79	24,472

​​​​​​   

EAC = $ 24,472/3.79

= $ 6,457 (Approx)