# Www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 1 Economic Service Life.

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www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 1 Economic Service Life

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 2 of 52 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. Ownership (Capital) cost Operating cost + Minimize

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 3 of 52 Mathematical Relationship Capital (Ownership) Cost: Operating Cost: Total Cost: Objective: Find n* that minimizes AEC CR(i) OC(i) AEC n*n*

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 4 of 52 Example 11.4 Economic Service Life for a Lift Truck

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 5 of 52 Steps to Determine an Economic Service Life N = 1 (if you replace the asset every year) AEC 1 = \$18,000(A/P, 15%, 1) + \$1,000 - \$10,000 = \$11,700

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 6 of 52 N = 2 (if you replace the asset every other year) AEC 2 = [\$18,000 + \$1,000(P/A, 15%, 2)](A/P, 15%, 2) - \$7,500 (A/F, 15%, 2) = \$8,653

www.izmirekonomi.edu.tr Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics Spring, 2007 7 of 52 N = 3, AEC 3 = \$7,406 N = 4, AEC 4 = \$6,678 N = 5, AEC 5 = \$6,642 N = 6, AEC 6 = \$6,258 N = 7, AEC 7 = \$6,394 Minimum cost Economic Service Life If you purchase the asset, it is most economical to replace the asset for every 6 years

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