Q:1

CP=12200 and Scrap=200

YR of Service
1
2
3
4
5
6
7
8

Purchase price (12200-200)

12000
12000
12000
12000
12000
12000
12000
12000

Maint.Cost f(T)
220
500
800
1200
1800
2500
3200
4000

f(t)
220
720
1520
2720
4520
7020
10220
14220

The Average annual cost for the 6th yr is minimum and after that it is increasing
hence it should be replaced in the 6th year

Total cost (C-S+F(T))

12220
12720
13520
14720
16520
19020
22220
26220

TABLE 1

3600

MACHINE A
Annual operating cost
(3)
40

3600

400

440

4040

2020

3600

760

1200

4800

1600

Yr of
Service(1)
1

Purchase price(2)

f(t) (4)

Total cost(5)=2+4

ANNUAL COST=(5)/(1)

40

3640

3640

3600

1120

2320

5920

1480

3600

4720

7040

10640

2128

3600

8320

15360

18960

3160

Machine A should be replaced at the end of 4yrs

TABLE 2
MACHINE B

Cp=4000
Yr of
Service(1)
1

Purchase price(2)

Running cost (3)

f(t) (4)

Total cost(5)=2+4

AVG. ANNUAL COST=(5)/(1)

2500

200

200

2700

2700

3000

400

600

3600

1800

3500

600

1200

4700

1566

4000

800

2000

6000

1500

4000

1000

3000

7000

1400

4000

1200

4200

8200

1366

4000

1400

5600

9600

1371

4000

1600

7200

11200

1400

Machine B should be replaced at the end of 6 yr

Moreover the lowest average cost of Rs 1366 is less than
the lowest average cost of Rs 1480,hence machine A should be replaced by machine B

Purchase Price=3000
1
Yr of service

2
Running Cost (R)

3
Discount factor=Vn-1

4
Dis.Run Cost=R.V
1

5
n-

7=5/6

Tot.dis.cost=C+ DividingFactorV Weighted Avg annu

n-1
n-1
cost
R.V

500

500

3500

3500

600

0.9

540

4040

1.9

2126

800

0.81

648

4688

2.71

1729

1000

0.729

729

5417

3.439

1575

1300

0.6561

852.93

6269.93

4.0951

1531

1600

0.59049

944.784

7214.714

4.68559

1539

2000

0.531441

1062.882

8277.596

5.217031

1586

The weighted average annual cost is minimum for the 5th yr after that it is increasing
hence the machine should be replaced at the end of 5yrs

Cost of new machine=Rs 4000

1

Yr of service Maint.Cost (R) Discount factor=Vn-1

4
Dis.Maint Cost=R.V
1

5
n-

7=5/6
n-

Tot.dis.cost=C DividingFactorV WeightAvgannul.cos

n-1
1
t
+R.V

4000

4000

500

0.9523

476.15

4476.15

1.9523

2292

1000

0.90687529

906.87529

5383.02529

2.85917529

1882

1500

0.863617339

1295.426008

6678.451298

3.722792629

1793

2000

0.822422792

1644.845583

8323.296881

4.54521542

1831

2500

0.783193224

1957.983061

10281.27994

5.328408645

1929

The weighted average annual cost is minimum for the 4th yr after that it is increasing
hence the machine should be replaced at the end of 4yrs