Mutually Exclusive Alternatives Lecture
1. Your accountant has provided you with the following table of salvage values for a certain type of apricot
squeezing machine, which you are considering for use in your Sour Apricot Sherbet Shop.
Year Salvage value
1 $22,000
2 21,000
3 20,000
4 16,000
5 10,000
Calculate the economic life (years) of this piece of equipment. The first cost is $25,000 and MARR is 12%.
Hint: EAC for five year life is $5361.
2. A construction equipment for Tech Builders Inc has a first cost of $25,000 and the following salvage
values and annual operating costs:
t S (t) Op. cost (t)
1 $22,000 $10,000
2 21,500 10,500
3 20,000 11,000
4 19,500 11,500
5 10,000 12,000
6 0 12,500
Use a MARR of 10% and determine the EAC of keeping the equipment for all possible years and
determine the optimal economic life of the equipment.
3. Packaging problem
a. A packaging machine that has been used for 2 years has a salvage value of $12,000 now which will
drop by $2000 per year. Over the next 5 years, the maintenance costs for the machine are expected
to be $2500, $2900, $3500, 4500, and 4500. If the MARR is 8%, determine the marginal cost to
extend service for each of the next 5 years.
Hint: MC2 = $5700
b. A replacement piece of equipment can be purchased for the machine above at a first cost of
$25,000. Annual maintenance costs the first year are expected to be $1000 and increase by $300
each year. If this equipment were to be sold after 1 year, income of 20,000 could be realized. Each
year the machine is kept, the salvage value would decrease by $3500. What is the optimal
economic life and associated EAC of this equipment?
Hint: EAC3=$6981
c. Should the new equipment be purchased now? Why?
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