Question

uncle elmo need to replace the family privy .the loacl sanitary engineering has submitte two alternative structure proposal with respective cost estinates as shown below                             masonite.        brick
firat cost               2500.          10000
annual maintenance cost 200.     100
salvage value   100.        1000
servuce life       4.         20
which construction should elmo coose if minimum attractive rate of return is 6% .use annual xost approach in your comaprison of solutuon draw a cash flow diagram         

Answer 1

Ans:-

COMPUTATION OF EQUIVALENT ANNUAL COST OF MASONITE
PARTICULARS	CASH FLOW	YEARS	PVF@6%	DCF
COST	$2,500	0	1	2500
MAINTENANCE COST	$200	1-4	3.465	693
TOTAL CASH OUT GO				3193
LESS:SALVAGE VALUE	100	4	0.792	79.2
PRESENT COST OF MASONITE				3113.8
ANNUITY FACTOR@6% FOR 4YEARS				3.465
EQUATED ANNUAL COST (PV/PVIF)				898.64
COMPUTATION OF EQUIVALENT ANNUAL COST OF BRICKS
PARTICULARS	CASH FLOW	YEARS	PVF@6%	DCF
COST	$10,000	0	1	10000
MAINTENANCE COST	$100	1-20	11.47	1147
TOTAL CASH OUT GO				11147
LESS:SALVAGE VALUE	100	20	0.312	31.2
PRESENT COST OF MASONITE				11115.8
ANNUITY FACTOR@6% FOR 4YEARS				11.47
EQUATED ANNUAL COST (PV/PVIF)				969.12

SELECT MASONITE AS ITS EAC IS LESS AS COMPARED TO BRICKS.