Question

Incredible Gadgets, LLC is investing in new equipment to upgrade their business. The cost of this equipment is $75,000 with costs of $10,000 for installation and start-up. The product that they will make with this has material costs of $3/unit and labor costs of $5/unit with expected annual production of 10,000 units. Overhead is 50% of labor costs and maintenance costs are $2500 per year with an expected increase of $250 per year during the life of the equipment. The equipment is expected to last 8 years and have a salvage value of 20% at that time. Assuming a planned ROI for the firm of 15%, what are the TOTAL annual costs?

Answer 1

initial cost of machine = 75000

intallation cost = 10000

total initial cost = 75000 + 10000 = 85000

Material cost per year = 3*10000 = 30000

Labor cost per year = 5*10000 = 50000

overhead per year = 0.5*50000 = 25000

maintenance cost = 2500 in first year then increasing by 250 per year uptill eoy8

salvage value = 20% of the cost of machine = 0.2*75000 = 15000

Equivalent uniform annual cost (EUAC) = 85000*(A/P, 15%,8) + 30000 + 50000 + 25000 + 2500 + 250*(A/G,15%,8) - 15000*(A/F,15%,8)

= 85000*0.222850 + 30000 + 50000 + 25000 + 2500 + 250*2.78132 - 15000*0.072850

= 126044.83