Problem-03: (a) A machine owner finds from his past records that the cost per year of maintaining

a machine A whose purchase price is Tk. 6,000 is as given below: Year Maintenance Costs (Tk.) Resale Value (Tk.) 1 1,000 3,000 2 1,200 1,500 3 1,400 750 4 1,800 375 5 2,300 200 6 2,800 200 7 3,400 200 8 4,000 200

At what age is a replace due? (b) The machine owner of the previous part (a) has another machine B whose capacity is 50% more than machine A is Tk. 8,000. The estimated maintaining cost and resale value for this machine is given below: Year Maintenance Costs (Tk.) Resale Value (Tk.) 1 1,200 4,000 2 1,500 2,000 3 1,800 1,000 4 2,400 500 5 3,100 300 6 4,000 300 7 5,000 300 8 6,100 300

What should be replacement policy among two machines? Solution-03: Table: Determination of Optimum Replacement Period for Machine A Year 1 1 2 3 4 5 6 7 8 Resale Value (Tk) 2 3,000 1,500 750 375 200 200 200 200 Annual Cumulative Depreciation Maintenance Maintenance Cost (Tk.) Cost (Tk.) 3={6,0004 5 (2)} 3,000 1,000 1,000 4,500 1,200 2,200 5,250 1,400 3,600 5,625 1,800 5,400 5,800 2,300 7,700 5,800 2,800 10,500 5,800 3,400 13,900 5,800 4,000 17,900 Total Cost (Tk.) 6= (3+5) 4,000 6,700 8,850 11,025 13,500 16,300 19,700 23,700 Average Cost (Tk.) 7= 6/no. of years 4,000 3,350 2,950 2,756 2,700* 2,717 2,814 2,963

From the above table we find that average cost (Tk. 2,700) is lowest at the end of the 5th year or beginning of the 6th year, compared to maintenance cost. So the machine-A should be replaced at the end of 5th year.

Table: Determination of Optimum Replacement Period for Machine B Year 1 1 2 3 4 5 6 7 8 Resale Value (Tk) 2 4,000 2,000 1,000 500 300 300 300 300 Annual Cumulative Depreciation Maintenance Maintenance Cost (Tk.) Cost (Tk.) 3={8,0004 5 (2)} 4,000 1,200 1,200 6,000 1,500 2,700 7,000 1,800 4,500 7,500 2,400 6,900 7,700 3,100 10,000 7,700 4,000 14,000 7,700 5,000 19,000 7,700 6,100 25,100 Total Cost (Tk.) 6= (3+5) 5,200 8,700 11,500 14,400 17,700 21,700 26,700 32,800 Average Cost (Tk.) 7= 6/no. of years 5,200 4,350 3,833 3,600 3,540* 3,617 3,814 4,100

From the above table we find that average cost (Tk. 3,540) is lowest at the end of the 5th year or beginning of the 6th year, compared to maintenance cost. As per given information it reveals that machine B has 50% more capacity than machine A. Therefore, 2 larger machines B are equivalent to 3 smaller machines A. The average yearly cost of machine B is Tk. 3,540 which is equivalent to TK. 2,360 (2 x 3540/3) of 1 smaller machine A. Since, this is less than Tk. 2,700, the lowest average cost of 1 smaller machine A. Therefore, the smaller machine A should be replaced by the larger machine B. Problem-04: Machine A cost Tk. 9,000, annual operating cost are Tk. 200 for the 1 st year and then increased by Tk. 2,000 every year. Determine the best age at which to replace the machine if the optimum replacement policy is followed? What will be the average yearly cost of owing and operating the machine assumes that the machine has no resale value. Machine B cost Tk. 10,000 annual operating costs are Tk. 400 for the 1 st year and then increased by Tk. 800 every year and have no resale value. You have now a machine of Type A which is one year old. Should you replace it with machine B?

Solution-04: Table: Determination of Optimum Replacement Period for Machine A Year 1 1 2 3 4 5 6 7 8 Resale Value (Tk) 2 0 0 0 0 0 0 0 0 Annual Cumulative Depreciation Maintenance Maintenance Cost (Tk.) Cost (Tk.) 3={9,0004 5 (2)} 9,000 200 200 9,000 2,200 2,400 9,000 4,200 6,600 9,000 6,200 12,800 9,000 8,200 21,000 9,000 10,200 31,200 9,000 12,200 43,400 9,000 14,200 57,600 Total Cost (Tk.) 6= (3+5) 9,200 11,400 15,600 21,800 30,000 40,200 52,400 66,000 Average Cost (Tk.) 7= 6/no. of years 9,200 5,700 5,200* 5,450 6,000 6,700 7,486 8,325

From the above table we find that average cost (Tk. 5,200) is lowest at the end of the 3rd year or beginning of the 4th year, compared to maintenance cost. So the machine-A should be replaced at the end of 3rd year. Table: Determination of Optimum Replacement Period for Machine B Year 1 1 2 3 4 5 6 7 8 Resale Value (Tk) 2 0 0 0 0 0 0 0 0 Annual Cumulative Depreciation Maintenance Maintenance Cost (Tk.) Cost (Tk.) 3={10,0004 5 (2)} 10000 400 400 10000 1200 1600 10000 2000 3600 10000 2800 6400 10000 3600 10000 10000 4400 14400 10000 5200 19600 10000 6000 25600 Total Cost (Tk.) 6= (3+5) 10400 11600 13600 16400 20000 24400 29600 35600 Average Cost (Tk.) 7= 6/no. of years 10400 5800 4533 4100 4000* 4067 4229 4450

From the above table we find that average cost (Tk. 4000) of machine B is lowest at the end of the 5th year or beginning of the 6 th year, compared to maintenance cost. So the machine-B should be replaced at the end of 5th year. From the above calculation it is found that lowest average cost Tk. 4,000 for machine B is less than the lowest average cost of Tk. 5,200 for machine A. So, the machine A should be replaced by machine B.