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    Replacement Decisions: equivalent annual cost

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    A certain machine costs $25,000 to purchase and install. It has salvage values and operating costs as shown in the table in the attached file. The salvage value of $20,000 listed at time 0 reflects the loss of the installation costs at the time of installation. The MARR is 12%.

    Life in Years Salvage value Operating cost
    0 $20,000.00
    1 16000.00 $3,000.00
    2 12800.00 3225.00
    3 10240.00 3466.88
    4 8192.00 3726.89
    5 6553.60 4006.41
    6 5242.88 4306.89
    7 4194.30 4629.90
    8 3355.44 4977.15
    9 2684.35 5350.43
    10 2147.48 5751.72
    11 1717.99 6183.09
    12 1374.39 6646.83
    13 1099.51 7145.34
    14 879.61 7681.24
    15 703.69 8257.33
    16 562.95 8876.63
    17 450.36 9542.38
    18 360.29 10258.06

    a) What is the economic life of the machine?
    b) What is the equivalent annual cost over that life?

    Now assume that the MARR is 5%.
    c) What is the economic life of the machine?
    d) What is the equivalent annual cost over that life?
    e) Explain the effect of decreasing the MARR.

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    https://brainmass.com/economics/macroeconomics/replacement-decisions-equivalent-annual-cost-74844

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    Solution Summary

    The economic life of the machine, the equivalent annual cost are calculated and the effect of decreasing the MARR is examined.

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