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

2. 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

3. 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*

4. 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

5. 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

6. 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

7. 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