Contemporary Engineering Economics, 4 th edition, © 2007 Economic Service Life Lecture No. 57 Chapter 14 Contemporary Engineering Economics Copyright © 2006

Contemporary Engineering Economics, 4 th edition, © 2007 Economic Service Life  Definition: Economic service life is the remaining useful life of an asset that results in the minimum annual equivalent cost.  Why do we need it?: We should use the respective economic service lives of the defender and the challenger when conducting a replacement analysis. Ownership (Capital) cost Operating cost + Minimize Annual Equivalent Cost

Contemporary Engineering Economics, 4 th edition, © 2007 Mathematical Relationship Capital Cost: Operating Cost: Total Cost: Objective: Find n* that minimizes AEC CR(i) OC(i) AEC n*n*

Contemporary Engineering Economics, 4 th edition, © 2007 Example 14.3 Economic Service Life for a Lift Truck

Contemporary Engineering Economics, 4 th edition, © 2007 AEC if the Asset is Kept for just 1 or 2 Years  N = 1 AEC 1 = $18,000(A/P, 15%, 1) + $1,000 - $10,000 = $11,700  N = 2 AEC 2 = [$18,000 + $1,000(P/F, 15%, 1)] х(A/P, 15%, 2) - $6,350 (A/F, 15%, 2) = $8,653

Contemporary Engineering Economics, 4 th edition, © 2007 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 AEC if the Asset were Kept N Years