An asset is purchased for $350,000. Its O&M costs are $50,000 in the first year and are expected to grow 25% each year through its maximum service life of five years. The salvage value of the asset drops 30% after the first year and an additional 10% each year thereafter. If the interest rate is 15%,

a. What is the economic life of the asset?

b. If an asset currently owned is 3-years-old, should it be kept or replaced? If kept, for how long? using the marginal cost analysis.

c. Re-solve part (b), assuming that the asset is needed to be service for only four more periods. using the EAC method.

d. Reconsider the above asset again, but assume that a superior challenger is available which costs $360,000. However, O&M costs for the challenger start at $40,000 and increase 15% each year, while the salvage value declines 10% each period. The challenger also has a maximum service life of five years.

i. If this asset is the only challenger for the foreseeable future, when should the threeyear-old asset from above be replaced, assuming an infinite horizon? Use the EAC method.

ii. Re-solve part (i) if the horizon is four years. Use the PW method.