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, 4th
edition, © 2007
+
Operating
cost
Mathematical Relationship

Capital Cost:
CR(i)  I ( A / P, i, N )  S N ( A / F , i, N )

AEC
Operating Cost:
OC(i)
N
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*
Contemporary Engineering Economics, 4th
edition, © 2007
Example 14.3 Economic Service Life for a
Lift Truck
Contemporary Engineering Economics, 4th
edition, © 2007
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/F, 15%, 1)]
х(A/P, 15%, 2)
- $6,350 (A/F, 15%, 2)
= $8,653
Contemporary Engineering Economics, 4th
edition, © 2007
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, 4th
edition, © 2007
Minimum cost