Equivalent annual costs for machine B
FIGURE 6. Equivalent payments for 12-year analysis period.
- Compute the present worth of costs for the second
analysis period
The second 12-year period encompasses the fourth, fifth, and sixth lives of machine A
and the third and fourth lives of machine B. The "present" is the beginning of the second
12-year period. The annual cost of machine A during its fourth life is (0.9O)^3 times the an-
nual cost during its first life. Therefore, the results of step 3 can be applied. For machine
A, PW = $92,280(0.90)^3 - $67,270. For machine B, PW = $91,030(0.94)^2 = $80,430.
Thus, machine A should be used after the first 12 years. Realistically, since the transfer
from machine B to machine A can be made at the end of the first 6-year period, the deci-
sion should be reviewed at that time in the light of currently available forecasts.
ECONOMY OF REPLACING AN ASSET WITH
AN IMPROVED MODEL
A machine has been in use for 3 years, and its cost data for the next 8 years are shown in
Table 2, where the years are counted from the present. An improved model of this ma-
chine has just appeared on the market, and according to estimates it has an optimal life of
6 years with an equivalent uniform annual cost of $9400. No additional improvements are
anticipated in the near future. If money is worth 10 percent, when will it be most econom-
ical to retire the existing machine?
Calculation Procedure:
- Compute an equivalent single end-of-life payment for each
prospective remaining life
Let R = remaining life of machine, years. The annual cost corresponding to every possible
value of R will be found by a method that is a variation of that used in an earlier calcula-
tion procedure. Let CR = operating cost at end of Rth year and FR = equivalent single pay-
1st life 2nd life
Equivalent annual costs for machine A
Year
1st life 2nd life 3rd life
Year
