A machine purchased 1 year ago for $85,000 costs more to operate than anticipated. When purchased, the machine was expected to be used for 10 years with annual maintenance costs of $22,000 and a $10,000 salvage value. However, last year, it cost the company $35,000 to maintain it, and these costs are expected to escalate to $36,500 this year and in­crease by $1500 each year thereafter. The market value is now estimated to be $85,000 ? $10,000k, where k is the number of years since the machine was purchased. It is now estimated that this machine will be useful for a maximum of 5 more years. A replacement study is to be performed now. Deter­mine the values of P, n, AOC, and S of this defender.

Question

What will be an ideal response?

Answer 1

P = market value = 85,000 – 10,000(1)
= $75,000
n = 5 years
AOC = $36,500 + $1500t, where t = 0, 1, 2, 3, 4 for the 5-year max life remaining
S = $85,000 – 10,000(6)
= $25,000