You work as an equipment manager and is considering how often the equipment should be replaced. Suppose a new machine has the following costs over its useful life:
PERIOD Cost comment
(In thousand)
0 $20 purchasing price
1 $1 maintenance cost
2 $1.5 maintenance cost
3 $2.5 maintenance cost
4 $4 maintenance cost
5 $6 maintenance cost
6 $8.5 maintenance cost
7 $12 maintenance cost
The cost of capital is 10%.
1. If you had to buy the machine and rent to the production manager for that machine’s economic life, what annual rental payment would you have to charge?