The first machine was $240,000 three years ago. The operating and maintenance cost of a costs of this machine
The first machine was $240,000 three years ago. The operating and maintenance cost of a costs of this machine along the past three years have been as follows.
Investment of $240,000 is made at t = 0. The life of the machine is 3+6 = 9 years.
Economic life is the period which minimizes the annual equivalent (AE) costs.
AE(n=1) = (240,000-60,000)*(A/P,8%,1)+0.08*60,000+34984 = 234,184
AE (n=2) = (240,000-60,000)*(A/P,8%,2)+0.08*60,000+[34,984*(P/F,8%,1)+44,984*(P/F,8%,2)](A/P,8%,2)
Similarly using the above formula the AE for all other years are computed as shown below:
|Time||Investment||Operating cost||Salvage value||A/P||P/F||AE|
As we can see from the above table that AE is minimum at 101,301.76 and this happens when t = 7.
Thus the economic life of machine is 7 years (from the time of purchase i.e from t=0.) Current point is end of 3 years so economic life is 4 years from the current point of end of 3 years.