Question

Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $3000000 and has operating cost of $50500 in the first year. For the remaining years, operating costs increase each year by 35% over the previous year's operating costs. It loses 7% of its value every year from the previous year's salvage value. The lift truck has a maximum life of 6 years. The firm's required rate of return is 5%. Find the economic service life of this new machine. 

Answer 1

Solution :

Year	Operating Cost	P/F (5%,n)	Present value of Operating cost at the beginning of year	Cumulative Present value of Operating cost at the beginning of year	Present worth of cumulative operating cost	A/P (5%,n)	Average equivalent annual costs
1	2	3	4 = 2 * 3	5	6 = 5 + 3000000	7	8 = 6 * 7
1	50,500	0.9524	48,096	48,096	3,048,096	1.0500	3,200,501
2	68,175	0.907	61,835	109,931	3,109,931	0.5378	1,672,521
3	92,036	0.8638	79,501	189,432	3,189,432	0.3673	1,171,478
4	124,249	0.8227	102,220	291,651	3,291,651	0.2820	928,246
5	167,736	0.7835	131,421	423,073	3,423,073	0.1728	591,507	LEAST
6	226,444	0.7462	168,972	592,045	3,592,045	0.1971	707,992

Since the annual cost is least in 5 years, so, economic service life of the machine = 5 years

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