Minimum Asset Life to Justify A Higher Investment

By: Analyn M. Catapang MSEE major in Computer Engineering

CONTENT:
Definition of asset
Classification of asset Comparing Alternatives Compounding-Interest Table Sample Problem

What is asset?
Are economic resources. Anything tangible or intangible that is capable of being

owned or controlled to produce value and that is held to

have positive economic value.

Classification of Asset
The principal distinction normally made for business purposes is between:
Fixed

assets assets

ex. Debtors, stock, cash and work in progress

Current

ex. Land, buildings, machinery etc

How to present a winning justification for new and replacement equipment

From time to time it becomes clear that an item of equipment is expensive to maintain and it would be

cheaper to replace it. To get money for the change it is

necessary to justify the expenditure and prove that replacement is better decision than keeping the existing item.

Comparing Alternatives:
Determine the annual cost of an asset. The general method of computing annual costs can be used for any number of industrial or commercial assets regardless of whether they are stationary, moving, or water or air-borne.
The key fact is that accurate cost are required if the

annual cost comparison is to have validity.

Comparing Alternatives:
Determine the minimum asset life. Upon computing the annual cost together with the other expenses such as maintenance cost, interest rate, and the capital-recovery factor results will be used for the computation of the minimum asset life.
Used the Compounding-interest table depending upon

the percentage of interest rate used.

Compound-Interest Table

Sample problem
The timber floor of a bridge is to be replaced and consideration is being given to, treating the timber to prolong its life and reduce maintenance costs. An untreated timber floor costs $5000 and has an annual maintenance cost of $500 and a life of 10 years. A treated timber floor costs $8500 and has an annual maintenance cost of $300. How long should the treated timber last to make it more economical than the untreated timber? Use an interest rate of 5 percent.

Compute the annual cost of the untreated timber floor:

Given:
Initial cost (P) = $5000 Maintenance cost (M) = $500 Interest rate (i) = 5% Useful Life (N) = 10 Capital-recovery factor (CR) = 0.12950

Solve for A:
Formula: A = P(CR) + M

A = P(CR) + M A = $5000 (0.12950) + $500 A = $1147.50

The annual cost of the untreated timber floor is:

$1147.50

Setup an expression for the annual cost of the treated timber floor:
A = $8500 (CR) + $300

Compute the minimum life required to justify treating the timber:

Equate the annual cost:

$8500 (CR) + $300 = $1147.50 From the given equation compute the value of CR: $8500 (CR) = $1147.50 - $300 CR = $847.5 / $8500 CR = 0.099706

Interpolation Method
Interpolating in the compound-interest

table for 5 percent, we find N is within the range of 14 to 15 years. If we undergo the actual computation of interpolation the actual answer is 14.3 years. The life of the treated timber floor must exceed 14.3 years to make it more economical.

References:
Handbook of Civil Engineering Calculations thru Web Mechanical Engineering Board Reviewer in Engineering

Economics by Ricardo C. Asin

Engineering Economy 2nd Edition

by Hipolito B. Sta Maria

Thank You!