Solved problem on determination of economic life of an asset - 1
Solved problem on economic life of an asset - 1
A
firm is considering replacement of equipment, whose first cost is Rs. 4,500 and
the scrap value is negligible at the end of any year. Based on experience, it
was found that the maintenance cost is zero during the first year and it
increases by Rs. 250 every year thereafter.
(a)
When should the equipment be replaced if i = 0%?
(b)
When should the equipment be replaced if i = 10%?
Given data
First
cost = ₹. 4,500
Maintenance
cost at first year = ₹. 0
Maintenance
cost after first year increases ₹. 250 in an incremental order.
Solution
(a) When i = 0%
End
of year
|
Maintenance
cost at the end of year
|
Summation
of maintenance costs
|
Average
cost of maintenance through year given
|
Avg.
first cost if replaced at year end given
|
Avg.
total cost through year given
|
A
|
B
(₹)
|
C(₹)
|
D(₹)
|
E(₹)
|
F(₹)
|
∑B
|
C/A
|
4,500/A
|
D+E
|
||
1
|
0
|
0
|
0
|
4,500
|
4,500
|
2
|
250
|
250
|
125
|
2,250
|
2,375
|
3
|
500
|
750
|
325
|
1,500
|
1,825
|
4
|
750
|
1,500
|
375
|
1,125
|
1,500
|
5
|
1,000
|
2,500
|
500
|
900
|
1,400
|
6
|
1,250
|
3,750
|
750
|
750
|
1,500
|
(b) When i = 10%
(a)
Equipment should be replaced at the end of 5th year, when i = 0%
(b)
Equipment should be replaced at the
end of 7th year, when i = 10%
