Question

2. (10 marks) An asset costs $50,000 to purchase and install. The asset has a resale value of $40,000 after installation. It then declines in value by 20% per year. (a) Determine the equivalent annual capital cost for owning this asset for one, two, three, and four years. Use a MARR of 15%. (b) Further research into this asset reveals that there is a high probability that the salvage value will drop to $5,000 in the fourth year because of a predictable wearing-out of a major component. What would be the equivalent annual capital cost of owning this asset for four years, given this new information? (again, use a MARR of 15%) (c) Is your answer to (b) consistent with the typical trend of EAC(cap) costs as discussed in class? Comment on the reasons why it may differ.

Answer 1

Asset cost	50,000
Resale value after installation	40,000
MARR	15%
Resale value computation
Year	1	2	3	4
Opening resale value	40,000	32,000	25,600	20,480
Declaine in resale value @ 20%	8,000	6,400	5,120	4,096
Resale value (Opening resale value - Decline)	32,000	25,600	20,480	16,384
Equated Annual Capital cost ----> (Asset Price* annutiy factor) - Resale value
Annuity factor ----> (1-(1+ MARR)^-no. of periods)/Discount rate
Year	1	2	3	4
Asset price	50,000	50,000	50,000	50,000
Annuity factor	0.8696	1.6257	2.2832	2.8550
EAC	57,500	30,756	21,899	17,513
Resale value	32,000	25,600	20,480	16,384
Equated annual capital cost (EAC- resale value)	25,500	5,156	1,419	1,129
In case resale value of 4th year drops to $5000
Year	4
Asset price	50,000
Annuity factor	2.8550
EAC	17,513
Resale value	5,000
Equated annual capital cost (EAC- resale value)	12,513