TABLE 5
Operating cost Excess operating cost
Year for 1 -year life, $ for 8-year life, $
1 12,000 O
2 11,400 1,600
3 10,800 3,800
4 10,200 6,300
5 9,600 9,200
6 9,000 12,500
7 8,400 16,100
8 7,800 20,200held 3 years, the excess operating cost is $1600 for the second year and $3800 for the
third year, and these values apply to each subsequent life. Since only differences in cost
are significant, the prospective lives of the machine will be compared by applying the ex-
cess rather than the actual operating costs.
- Compute an equivalent single end-of-life payment for every
prospective life
Annual costs will be computed by using the same method as in the previous calculation
procedure, but applying excess operating costs. Thus, with / = 10 percent, F 1 =
$40,000(1.10) = $44,000; F 2 = $44,000(1.10) + $1600 = $50,000; F 3 - $50,000(1.10) +
$3800 = $58,800; etc. The results are shown in Table 6.
3. Compute the annual cost for every prospective life
Proceeding as in the previous calculation procedure gives A 1 = ($44,000 - $25,000)1 =
$19,000; A 2 = ($50,000 - $20,000)(0.47619) = $14,286; A 3 = ($58,800 - $17,000)
(0.30211) = $12,628; etc. The results are shown in Table 6. - Identify the most economical life of the machine
Table 6 reveals that a 4-year life has the minimum annual cost.
Related Calculations: Each excess annual operating cost shown in Table 5 con-
sists of two parts: a deterioration cost, which is the increase in operating cost due to aging
TABLE 6. Calculation of Annual Cost
Life, Annual
years F, $ L, $ SFP cost, $
1 44,00 0 25,00 0 1.00,00 0 19,00 0
2 50,00 0 20,00 0 0.4761 9 14,28 6
3 58,80 0 17,00 0 0.3021 1 12,62 8
4 70,98 0 15,00 0 0.2154 7 12,06 2
5 87,27 8 13,50 0 0.1638 0 12,08 5
6 108,50 6 12,00 0 0.1296 1 12,50 8
7 135,45 6 11,00 0 0.1054 1 13,11 9
8 169,20 3 10,00 0 0.0874 4 13,92 1