The following pair of assets differ only in the MARR. The problem asks you to determine the effect of this difference on the economic life and to explain the result. All assets decline in value by 20 percent of current value each year. Installation costs are zero for all assets. Further data concerning the four pairs of assets are given in the table that follows. Asset First Cost Initial Operating Cost Rate of Operating Cost Increase MARR A $120,000 $30,000 12.5% 5% B $120,000 $30,000 12.5% 25% a. Determine the economic lives for assets A and B. The economic life of asset A is (enter your response here) ​years, and the economic life of asset B is (enter your response here) years. b. Create a diagram showing the​ EAC(capital), the​ EAC(operating), and the​ EAC(total) for assets A and B. c. Explain the difference in economic life between A and B.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter17: Long-term Investment Analysis
Section: Chapter Questions
Problem 2E
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The following pair of assets differ only in the MARR. The problem asks you to determine the effect of this difference on the economic life and to explain the result. All assets decline in value by 20 percent of current value each year. Installation costs are zero for all assets. Further data concerning the four pairs of assets are given in the table that follows.

Asset First Cost Initial Operating Cost Rate of Operating Cost Increase MARR
A $120,000 $30,000 12.5% 5%
B $120,000 $30,000 12.5% 25%

a. Determine the economic lives for assets A and B.

The economic life of asset A is (enter your response here) ​years, and the economic life of asset B is (enter your response here) years.

b. Create a diagram showing the​ EAC(capital), the​ EAC(operating), and the​ EAC(total) for assets A and B.

c. Explain the difference in economic life between A and B. 

 
 
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