Question: A $40,000 machine will be purchased by a company whose interest rate is 12%. The installation cost is $5K, and the removal costs are insignificant.

A $40,000 machine will be purchased by a company whose interest rate is 12%. The installation cost is $5K, and the removal costs are insignificant. The machine is now 1 year old. Calculate the marginal cost to extend service for this year and for each of the 3 years. New challengers are not significant improvements over the machine and they cost the same. What is the economic life of the existing machine?

Year 1 2 3 4 5

S $35K $30K $25K $20K $15K

O&M $8K $14K $20K $26K $32K

Calculate the EACs for remaining lives of 1, 2, 3 and 4 years. Calculate the EACs for a used machine that is purchased for $35K and installed at a cost of $5K. Which of these is theoretically wrong? Is either theoretically correct? Why?

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