Milliken uses a digitally controlled "dyer" for placing intricate and integrated patterns on manufactured carpet squares for home and commercial use. It is purchased for $400,000. Its market value will be $310,000 at the end of the fi rst year and drop by $40,000 per year thereafter to a minimum of $30,000. Operating costs are $20,000 the fi rst year, increasing by 8% per year. Maintenance costs are only $8,000 the fi rst year but will increase by 35% each year thereafter. Milliken’s MARR is 20%. Determine the optimum replacement interval for the dyer.

It should be replaced after every 2yrs

Explanation:

It is problem where Milliken is using dyer to manufacture carpet. It has an initial cost of $400,000. Its market value at the end of year 1 is $310,000. Then it is decreasing anually by $40,000. At the end of its life its value will be $30,000. Thus life of a dyer is maximum 8 years. In table below, value of dyer and depreciation are shown in column 2 and 3.

With depreciation you have to add Operating cost. For first year it is $20,000. Thereafter it is going up by 8% per year. So multiply previous years operating cost by 1.08 to get current years operating cost. It is shown in column 4.

Next item of cost is maintenance. It is $8,000 in first year. Thereafter it is growing at 35%. So multiply previous years figure by 1.35 to get current years maintenance cost. It is shown in column (6).

Now calculate discouting factor using 20% rate. It is shown in column 7. Add them to get cumulative discounting factor as shown in column 8.

Next multiply total cost of a year by its discounting factor to get present value of cost. It is shown in column 9.

Ascertain cumulative figure of column 9 and get figures of column 10.

Fially divide figures of column 10 by column 8 to get yearly average cost.

Select the minimum figure of last column. Year of first column against this figure is replacement interval. Consider the table below attached

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explanation:

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