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Determine the optimum period for replacement of the machine.

The data collected in running a machine, the cost of which is Rs. 60,000, are given below: -

Year 1 2 3 4 5
Resale Value (Rs.) 42,000 30,000 20,400 14,400 9,650
Cost of spares (Rs.) 4,000 4,270 4,880 5,700 6,800
Cost of Labour (Rs.) 14,000 16,000 18,000 21,000 25,000

Determine the optimum period for replacement of the machine. -

1 Answer
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Cost of machine ( C )= Rs. 60,000

Year Resale value (S) Purchase price resale value (C-S) Cost of spares Cost of labour Total costs Σ Costs Total costs (purchase price resale value + Σ costs) Average annual cost
1 42000 18000 4000 14000 18000 18000 36000 36000
2 30000 30000 4270 16000 20270 38270 68270 34135
3 20400 39600 4880 18000 22880 61150 100750 33583.33
4 14400 45600 5700 21000 26700 87850 133450 33362.5
5 9650 50350 6800 25000 31800 119650 170000 34000

The machine should be replaced after 4 years of use.

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