Economic Service

Life
Lecture No. 57
Chapter 14
Contemporary Engineering Economics
Copyright 2006
Contemporary Engineering
Economics, 4th 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.

Minimize
Annual Equivalent Cost

Ownership (Capital)
cost

Contemporary
Engineering Economics,

+
Operating
cost

Mathematical
Relationship

Capital Cost:
CR(i ) I ( A / P, i , N ) S N ( A / F , i , N )

AEC

Operating Cost:

OC(i)

OC (i ) OCn ( P / F , i , n) ( A / P, i , N )
n 1

CR(i)

Total Cost:

AEC CR(i ) OC(i )

Objective: Find n* that

minimizes AEC

n*

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Engineering Economics,

Example 14.3 Economic Service

Life for a Lift Truck

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Engineering Economics,

AEC if the Asset is Kept for

just 1 or 2 Years

N=1
AEC1 = $18,000(A/P, 15%, 1)
+ $1,000 - $10,000
= $11,700

N=2
AEC2 = [$18,000 +
$1,000(P/A, 15%, 2)]
(A/P, 15%, 2)
- $7,500 (A/F, 15%, 2)
= $8,653
Contemporary
Engineering Economics,

AEC if the Asset were Kept N

Years
N = 3, AEC3 = $7,406
N = 4, AEC4 = $6,678
N = 5, AEC5 = $6,642
N = 6, AEC6 = $6,258
N = 7, AEC7 = $6,394
Economic Service Life
Contemporary
Engineering Economics,

Minimum cost

Sensitivity of Economic Service Life

For an asset with non-increasing operating

cost, keep the asset as long as it lasts.
If everything remains the same, a higher
interest rate will tend to extend the economic
service life (or defer the replacement
decision).

Contemporary
Engineering Economics,