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.

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