- 2076 Shrawan · 2+2+8 marks
Defender, challenger, ESL of router
Short answer
Defender is the existing asset; challenger is the replacement. Economic service life minimizes equivalent annual cost. For the router at 10% MARR, ESL is 3 years with minimum AEC of $7,706.
Define defender and challenger and explain economic service life. Nepal Telecom is going to purchase a router having initial cost $18,000 with salvage value of $12,000 at the end of first year and decreasing by 10% each year thereafter for the remaining useful life. Annual operation and maintenance cost is $2000 in the first year and increases by $1500 each year. Its useful life is 8 years. Calculate economic service life of the router.
Defender and challenger
- Defender: the asset currently in use, which is being considered for replacement. Its cost basis is its present market (opportunity) value, not its original cost.
- Challenger: the best available alternative asset that may replace the defender.
Economic service life (ESL)
ESL is the number of years of service that gives the minimum equivalent annual cost (AEC) of owning and operating an asset. As the asset ages, the capital cost per year falls but operating and maintenance costs rise, so total AEC first falls and then rises; the ESL is where it is lowest.
ESL of the router
MARR is not given; assume i = 10%. Data: P = $18,000; salvage value MV₁ = 12,000, then falling 10% a year (MV_n = 12,000(0.9)^(n−1)); O&M = 2,000 + 1,500(k − 1) in year k; maximum life 8 years.
AEC(n) = [18,000 + Σ O&M_k (P/F,10%,k) − MV_n (P/F,10%,n)] (A/P,10%,n)
| n | MV_n | PW of total cost | AEC(n) |
|---|---|---|---|
| 1 | 12,000 | 8,909 | 9,800 |
| 2 | 10,800 | 13,785 | 7,943 |
| 3 | 9,720 | 19,165 | 7,706 |
| 4 | 8,748 | 24,932 | 7,865 |
| 5 | 7,873 | 30,986 | 8,174 |
| 6 | 7,086 | 37,237 | 8,550 |
| 7 | 6,377 | 43,609 | 8,958 |
| 8 | 5,740 | 50,035 | 9,379 |
Example for n = 3: PW of O&M = 2,000(0.9091) + 3,500(0.8264) + 5,000(0.7513) = 8,467; PW = 18,000 + 8,467 − 9,720(0.7513) = 19,165; AEC = 19,165(0.40211) = 7,706.
AEC is lowest at n = 3 ($7,706) and rises afterwards.
Answer: The economic service life of the router is 3 years (minimum AEC ≈ $7,706 per year at i = 10%).
✓ Answer checked by Claude Opus 5.5 (high effort)
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