Reference no: EM132387936

You are planning for the purchase of a new piece of equipment for your plant that will cost $12,000 (including installation). You have been provided with the following estimates of the salvage values if sold at various years. Maintenance costs are expected to increase each year. Salvage value and Maintenance Costs are assumed to occur at year end. The firm's interest rate is 9%.

(a) Determine the equivalent annual cost if the equipment is kept for 1 year, 2 years, 3 years, 4 years, 5 years or 6 years.

(b) What is the economic life of the equipment?

Year          Salvage Value(including removal costs)              Maintenance Cost

1                     $8,500                                                             $600

2                     $7,200                                                             $850

3                     $5,300                                                             $1,200

4                     $3,500                                                             $1,700

5                     $1,000                                                             $2,350

6                     $-1000                                                             $2,600