Spring, 2007
Economic Service Life
www.izmirekonomi.edu.tr
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
1
Spring, 2007
Economic Service Life of an Asset
 Def: The Economic
service life is the useful life
of a defender, or a
challenger, that results in
the minimum equivalent
annual cost of owning and
operating the asset.
 Why do we need it?: Any
defender and challenger
compassion should be
based on their respective
economic service life.
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
Minimize
Ownership (Capital)
cost
+
Operating
cost
2 of 52
www.izmirekonomi.edu.tr
Spring, 2007
Mathematical Relationship
 Capital (Ownership)
Cost:
AEC
CR(i )  I ( A / P, i , N )  S N ( A / F , i , N )
OC(i)
 Operating Cost:
F OC ( P / F ,i, n)IJ( A / P,i, N )
OC(i )  G
H
K
N
CR(i)
n
n 1
 Total Cost:
AEC  CR(i)  OC(i)
 Objective: Find n* that
minimizes AEC
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
n*
3 of 52
www.izmirekonomi.edu.tr
Spring, 2007
Example 11.4 Economic Service Life for a Lift
Truck
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
4 of 52
www.izmirekonomi.edu.tr
Spring, 2007
Steps to Determine an Economic Service Life
 N = 1 (if you replace the asset every year)
AEC1 = $18,000(A/P, 15%, 1) + $1,000 - $10,000
= $11,700
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
5 of 52
www.izmirekonomi.edu.tr
Spring, 2007
 N = 2 (if you replace the asset every other year)
AEC2 = [$18,000 + $1,000(P/A, 15%, 2)](A/P, 15%, 2)
- $7,500 (A/F, 15%, 2)
= $8,653
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
6 of 52
www.izmirekonomi.edu.tr
Spring, 2007
N = 3, AEC3 = $7,406
N = 4, AEC4 = $6,678
N = 5, AEC5 = $6,642
N = 6, AEC6 = $6,258
Minimum cost
N = 7, AEC7 = $6,394
Economic Service Life
Asst. Prof. Dr. Mahmut Ali GÖKÇE, Izmir University of Economics
If you purchase the asset,
it is most economical to replace
the asset for every 6 years
7 of 52
www.izmirekonomi.edu.tr