Problem: An item of equipment is to be purchased for $250,000. The anticipated operating costs, maintenance costs and salvage values for each year are detailed in the table overleaf. Determine the economic life of the equipment. It may be assumed that the cost of capital is 10%, depreciation for tax purposes of capital expenditure is allowable at 30% on a declining balance basis and the effective tax rate is 45%.
|
Years of service
|
Operating cost for year
|
Maintenance cost for year
|
Salvage value at end of year
|
|
1
|
40,000
|
5,000
|
100,000
|
|
2
|
60,000
|
5,000
|
90,000
|
|
3
|
70,000
|
5,000
|
80,000
|
|
4
|
70,000
|
5,000
|
70,000
|
|
5
|
80,000
|
6,000
|
60,000
|
|
6
|
80,000
|
6,000
|
50,000
|
|
7
|
80,000
|
8,000
|
40,000
|
|
8
|
90,000
|
9,000
|
30,000
|
|
9
|
100,000
|
10,000
|
20,000
|
|
10
|
110,000
|
11,000
|
10,000
|