A machine tool purchased 2 years ago for $40,000 has a market value best described by the relation $40,000 ? 3000k, where k is the number of years from time of purchase. Experience with this type of asset has shown that its annual operating cost is described by the relation $30,000 + 1000k. The asset’s salvage value was originally estimated to be $10,000 after a predicted 10-year useful life. Determine the current estimates for P, S, and AOC for a replacement study, assuming it will be kept only 1 more year, which will be the third year of ownership.
What will be an ideal response?
P is market value after 2 years: P = 40,000 – 2(3000) = $34,000
S is market value after 3 years: S = 40,000 – 3(3000) = $31,000
AOC, year 3 = 30,000 + 3(1000) = $33,000
(Note: P and AOC will carry – signs in an evaluation)
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