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Economic Service Life

Economic Service Life. Economic Service Life of an Asset. Def : The Economic service life is the useful life of a defender, or a challenger, that results in the minimum equivalent annual cost of owning and operating the asset.

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Economic Service Life

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  1. Economic Service Life

  2. Economic Service Life of an Asset • Def: The Economic service life is the useful life of a defender, or a challenger, that results in the minimum equivalent annual cost of owning and operating the asset. • Why do we need it?: Any defender and challenger compassion should be based on their respective economic service life. Minimize Ownership (Capital) cost + Operating cost

  3. Mathematical Relationship • Capital (Ownership) Cost: • Operating Cost: • Total Cost: • Objective: Find n* that minimizes AEC AEC OC(i) CR(i) n*

  4. Example 11.4 Economic Service Life for a Lift Truck

  5. Steps to Determine an Economic Service Life • N = 1 (if you replace the asset every year) AEC1 = $18,000(A/P, 15%, 1) + $1,000 - $10,000 = $11,700

  6. N = 2 (if you replace the asset every other year) AEC2 = [$18,000 + $1,000(P/A, 15%, 2)](A/P, 15%, 2) - $7,500 (A/F, 15%, 2) = $8,653

  7. N = 3, AEC3 = $7,406 N = 4, AEC4 = $6,678 N = 5, AEC5 = $6,642 N = 6, AEC6 = $6,258 N = 7, AEC7 = $6,394 Minimum cost If you purchase the asset, it is most economical to replace the asset for every 6 years Economic Service Life

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