Question

A company bought a generating set (or genset) years ago at P5M and is now fully depreciated. It plans to fix it at a cost of P2,534,504 so that it would still have 5-year life remaining and be annually operated at a cost of P1,705,829 and be sold by the end of its life at P400,000. Simultaneously, it will buy a medium-sized genset at a cost of P2.5M to be operated at P0.25M annually, and a salvage value of P0.35M at the end of 7 years. Leasing is the 2nd option having an annual payment of P1.4M and initial payment of P0.1M, lasting for 4 years. What is the Annual Equivalent Cost of the 1st Option when interest is 20% cpd.-annually?

Answer 1

R = 20%

PW of the option 1 = 2534504 + 1705829*(P/A, 20%, 5) - 400000*(P/F, 20%, 5) + 2500000*(P/F, 20%, 5) + 250000*(P/A, 20%, 7)*(P/F, 20%, 5) - 350000*(P/F, 20%, 12)

PW of the option 1 = 2534504 + 1705829*2.9906 - 400000*.4019 + 2500000*.4019 + 250000*3.6046*.4019 - 350000*.1122

PW of the option 1 = P 8802848.39

Now Let, Annual Equivalent Cost = AEC

Then,

AEC of the option 1 = 8802848.39*(A/P, 20%, 12)

AEC of the option 1 =8802848.39*.2253

AEC of the option 1 = P 1983281.74 or 1983282