Milliken uses a digitally controlled dyer for placing intricate patterns on manu
ID: 2451544 • Letter: M
Question
Milliken uses a digitally controlled dyer for placing intricate patterns on manufactured carpet squares for home and commercial use. It is purchased for $400,000. Its market value will be $310,000 at the end of the 1st year and drop by $42,000 per year thereafter to a minimum of $30,000. Operating costs are $20,000 the 1st year, increasing by 6% per year. Maintenance costs are only $8,000 the 1st year but will increase by 37% each year thereafter. Milliken’s MARR is 18%. Determine the optimum replacement interval for the dyer.
Explanation / Answer
Depreciation schedule
Calculation of replace equivalent annual cost and replacement cycle
In the third year the equivalent annual cost ($ 68414.1694) is minimum and thereafter the same is gradually increasing. So the dyer should be replaced at the end of the third year.
Value at the beginning of the year ($) 400000 310000 268000 226000 184000 142000 100000 58000 Resale value at the end of the year ($) 310000 268000 226000 184000 142000 100000 58000 30000 running cost / depreciation ($) 90000 42000 42000 42000 42000 42000 42000 28000