Question

An injection molding system has a first cost of $150,000 and an annual operating cost of $77,000 in years 1 and 2, increasing by $4,500 per year thereafter. The salvage value of the system is 25% of the first cost regardless of when the system is retired within its maximum useful life of 5 years. Using a MARR of 14% per year, determine the ESL and the respective AW value of the system.

The ESL is _____ year(s) and AW value of the system is $_____.

Answer 1

The ESL is 5 year(s) and AW value of the system is -$119,498.63

We find this using the table below. Salvage value is fixed at 25% of 150000 = 37500. Annual cost is increasing by 4500 from 3rd year. We find the cumulative PV of all annual costs and all salvage values for all 5 years separately using PV = cash flow in year n * (1 + 15%)^-n.

Then we find the net present value by adding initial cost of 150000 to these two figures for all years. Finally using (A/P, 15%, n) for the net present value to get EUAC. Note that AW = -EUAC.

Year	Annual cost	Salvage value	PV of the annual cost	PV of the market value	Net present value	EUAC
1	77000	37500	67543.86	32894.74	184649.12	210500.00
2	77000	37500	126792.86	28855.03	247937.83	150570.09
3	81500	37500	181803.04	25311.43	306491.61	132015.58
4	86000	37500	232721.94	22203.01	360518.93	123731.82
5	90500	37500	279724.81	19476.32	410248.48	119498.63