Question

6. You’ve been tasked to evaluate an existing piece of machinery.You collected the following data:

Today
One Year Two Years Three Years Four Years Five Years Six Years Seven Years Eight Years Nine Years Ten Years

Salvage Value

$20,000 $10,000 $5,000 $2,500 $1,000 $500 $250 $0.00 $0.00 $0.00 $0.00

Annual MX Cost

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000

$10,000

What is the useful life of the existing piece of machinery? Cost of capital is 4%. Hint calculate EUAC at Years Six, Seven and Eight.

6. You've been tasked to evaluate an existing piece of machinery. You collected the following data: Salvage Value Annual MX Cost DU Today One Year Two Years Three Years Four Years Five Years Six Years Seven Years Eight Years Nine Years Ten Years $20,000 $10,000 $5,000 $2,500 $1,000 $500 $250 $0.00 $0.00 $0.00 $0.00 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 What is the useful life of the existing piece of machinery? Cost of capital is 4%. Hint calculate EUAC at Years Six, Seven and Eight.

Answer 1

EUAC for 6 yrs = 20000 * (A/P,4%,6) + 1000 + 1000 * (A/G,4%,6) - 250 * (A/F,4%,6)

= 20000 *0.190762 + 1000 + 1000 *2.385715 - 250 *0.150762

= 7163.26

EUAC for 7 yrs = 20000 * (A/P,4%,7) + 1000 + 1000 * (A/G,4%,7)

= 20000 *0.166610 + 1000 + 1000 *2.843318

= 7175.52

EUAC for 8 yrs = 20000 * (A/P,4%,8) + 1000 + 1000 * (A/G,4%,8)

= 20000 *0.148528 + 1000 + 1000 *3.294434

= 7264.99

As EUAC is lowest in 6th yr, Economic life = 6 yrs