Maintenance staff at the local ice-hockey arena are concerned about the reliability of their Zamboni

(a machine that 'conditions' the ice surface). They would like the management to considering buying a

new Zamboni.

A new machine will cost $15,000. Annual operating and maintenance costs will be $6,000 in the first

year, increasing by $200 each year. Assume the machine depreciates by $3,000 per year according to

straight-line depreciation. Assume the machine can be re-sold at its book value at any time.

a) Owning the proposed new machine for how many years will result in the minimum EAC

(equivalent annual cost)? Assume an interest rate of 8%. Note that the minimum EAC is also

called the 'economic life'.

b) If the old Zamboni reached its minimum EAC several years ago and its operating and

maintenance cost this year are expected to be $8,000, should the arena's management buy

the new Zamboni? Assume the operating and maintenance costs of the old Zamboni will

increase and assume it has a salvage value of zero. Explain your answer.