Due: Friday, March 20, 1998, 5:00pm, in the dropbox, Rosebrugh Building, 2nd Floor.
Note: State all the assumptions that you make for the first two questions.

Question #1: Many tractors of a particular type but of different ages are being used by a company engaged in large-scale farming operations. Although there have been no formal rules on the replacement policy, the usual practice has been to replace the tractors when they were about 10 years old. The first cost of a tractor is $24,000. An anlysis indicates that, on the average, the maintenance cost will be $2,000 for each year for the first seven years and $4000 for the rest.

It is desired to compare the equivalent annual costs for an average tractor assuming a 7-year life with such costs for an average tractor assuming a 10-year life. Estimated salvage value will be $8,000 for a 7-year old tractor and $4,500 for a 10 year old one. (Assume i=8%)

Question #2: A construction firm has a choice between buying or renting a facility. The cost data for owning the assets are as follows: Purchase price, $24,000; service life, 4 years; salvage value, $1,800; fixed operating cost, $9,200 per year; variable operating cost, $120 for each day the facility is used. The total cost of renting the facility is $225 per day. Determine the minimum number of days per year that the facility must be needed to justify its purchase. Draw the break-even chart. Assume i=15%. Also assume that fixed cost, variable cost and the rent are the equivalent uniform amounts that are estimated by taking the interest into account. (Hint: Only consider the discount while calculating the capital recovery cost.)

Question #3: Why do we need to consider life cycle cost? Name some of the benefits associated wih the life-cycle costing.