=+life after four years. These replacement cycles are expected to continue indefinitely. The management team believe that all such replacements will be for financially identical equipment, i.e. the cash inflows produced by the new and old equipment are the same. However, the cost of maintenance and operations increases with the age of the machine. These costs are shown in the table, along with the secondhand and scrap values.

Points in time (yearly intervals)

0 1

2 3

4 Initial outlay (£)

20,000 Operating and maintenance costs (E)

6,000 8.000 10,000 12,000 Secondhand/scrap value (£)

12,000 9,000 6.000 2,000 Assume The cost of capital is 10 per cent.

No inflation.

-

No technological advances.

No tax.

-

All cash flows occur on anniversary dates.

Required