Question

You purchase a machine for $80,000 now, with a salvage value of $25,000 in 10 years. The machine will have O&M costs and cost of raw goods totaling $30,000 per year. The machine will produce 5,000 parts per year. If i = 9% annual rate compounded annually, what is the cost per part produced?

Answer 1

The annual production is 5,000 parts per year.

In order to ascertain the cost per part produced, we have to first ascertain the annual production cost.

Cost of machine = $80,000

Salvage value = $25,000

O&M costs and cost of raw goods = $30,000

i = 9%

n = 10 years

Calculate the annual production cost -

Annual production cost = Cost of machine (A/P. i. n) + O&M costs and cost of raw goods - Salvage value (A/F, i, n)

Annual production cost = $80,000 (A/P, 9%, 10) + $30,000 - $25,000(A/F, 9%, 10)

Annual production cost = ($80,000 * 0.15582) + $30,000 - ($25,000 * 0.06582)

Annual production cost = $12,465.60 + $30,000 - $1,645.50

Annual production cost = $40,820.10

The annual production cost is $40,820.10

Calculate the cost per part produced -

Cost = Annual production cost/Annual production

Cost = $40,820.10/5,000 = $8.16

Thus,

The cost per part produced is $8.16