1. Economic Life
Economic life refers to the asset retention time(n) that yields its lowest equivalent AW
Example: Determine the economic life of an asset which has the costs shown i=10%
Year Cost,$ Salvage value,$ ,
, ,000
, ,000
, ,000
, ,000
, ,000
Solution: AW1 = -20,000(A/P,10%,1) – 5000(P/F,10%,1)(A/P,10%,1) + 10,000(A/F,10%,1)
= -$17,000
AW2 = -20,000(A/P,10%,2) –[5000(P/F,10%,1) (P/F,10%,2)](A/P,10%,2) (A/F,10%,2)
= -$13,429
Similarly, AW3 = -$13, AW4 = -$12, AW5= -$13,623
Therefore, its economic life is 4 years