Question 3

A new machine will cost $200,000. Its maximum useful life is 8 years. The expected market value (MV) of the

machine at the end of year 1 is $100,000, and it is expected to decline by $15,000 each year afterwards. The annual

operating cost (AOC) is projected to be $75,000 during the first year of operation, and it is expected to rise by 15%

every year afterwards. Assuming 11% minimum attractive rate of return, calculate the economic service life of the

machine. Your calculations need to include a table with the following columns: Year, MV, AOC, Capital Recovery,

Annual Worth (AW) of AOC, and Total AW. Illustrate your analysis with a properly labeled chart, featuring the

number of years of service on the horizontal axis, and capital recovery, annual worth of the AOC, and total annual

worth on the vertical axis (click to format the vertical axis and check the box "Values in reverse order" so that the axis

displays rising cost as movement up). Please provide a written statement clearly stating the length of the economic

service life of the machine.