CE5805 Operations Research Tutorial

Equipment Economics
1. A special purpose machine is to be purchased at a cost of $15000. The table below
shows the expected annual operating and maintenance cost and the salvage values for
each year of the machine’s service. If the interest rate is 10%, what is the economic
service life for this machine?

Year of Service O&M Cost Market Value

1 2500 12800
2 3200 8100
3 5300 5200
4 6500 3500
5 7800 0

2. A new asset is available from $220,000. O&M costs are $22,000 each year for the
first five years, $24,000 in year six, $28,000 in year seven, and $30,000 in year eight.
Salvage values are estimated to be $150,000 after one year and will decrease at a rate
of 20% per year thereafter. At a MARR of 12%, determine the service life of the
asset.

3. ABC Company plans to renew its entire fleet in 4 years’ time. However, with the
newly awarded job, it needs to buy another machine to increase its capacity. Based on
historical data, it is able to provide the following information on the operating costs:
Year 3 4 5

Operating Costs
PW (O&M) 1894 1976 2062

Ownership Costs
PW (purchase cost) X X X
Salvage 30% of X 30% of X 30% of X
PW (salvage)

PW (replace) Total O&O Total O&O Total O&O

Cost Cost Cost
EUAC replace ??? ??? ???
Additionally, the PW(O&M) in Years 1 and 2 are: 1739 and 1815 respectively, and
ABC’s Marginal Rate of Return (interest rate) is 15%. The salvage value of the
machine is typically 30% of its purchase cost.

a. Calculate the cumulative PW(O&M) in years 3,4 and 5.

b. What is EUAC, and write the expression for EUAC as a function of Present
Worth, interest rate and number of years.
c. Calculate the range of values for the Purchase Cost, X such that the economic
life of the new machine is 4 years, with the data provided. (Hint: You will
need to evaluate and compare the EUAC between Years 3, 4, and 5.)