Problem #1: The frequency of breakdown of a machine per month is shown in the

table. The cost of a breakdown is $1,000 and the cost of preventive maintenance is
$1,250 per month. If preventive maintenance is performed, the probability of a
machine breakdown is negligible. Should the manager use preventive maintenance,
or would it be cheaper to repair the machine when it breaks down?

Number of breakdowns: 0 1 2 3

Frequency of occurrence:.20 .30 .40 .10

Problem # 2: An equipment which costs Tk 15,000 has to be replaced with a new

equipment. The following data have been estimated:

Year 1 2 3 4 5 6 7 8

Resale value 12000 950 750 570 420 3900 210 2000
0 0 0 0 0
Annual maintenance cost 600 800 105 140 210 3500 500 6800
0 0 0 0
Problem # 3: A firm is considering replacement of a machine, whose cost price is $12,200 and
the scrap value is $200. The running (maintenance and operating) costs are found from
experience to be as follows:

Year 1 2 3 4 5 6 7 8

Running cost 200 500 80 1200 1800 2500 3200 4000

($) 0

When should the machine be replaced?