Question

# For alternatives shown in the table below you are trying to decide which alternative you should...

For alternatives shown in the table below you are trying to decide which alternative you should choose based on their capitalized costs (CC). Use an interest rate of 10% per year.

 Machine A Machine B First cost (AED) 20,000 240,000 Annual maintenance cost per year, AED 5,000 2,300 Periodic cost every 10 years , AED - 10,000 Salvage cost 2000 -- Life , years 4 ∞

Match the closest correct answers for the below questions:

 -       A.       B.       C.       D.       E.       F.       G.       H.       I. Calculate the present value of the maintenance costs for Alternative B. -       A.       B.       C.       D.       E.       F.       G.       H.       I. Calculate the Anuual value of the periodic costs for Alternative B. -       A.       B.       C.       D.       E.       F.       G.       H.       I. Calculate CC of Alternative B -       A.       B.       C.       D.       E.       F.       G.       H.       I. Calculate the CC of Alternative A -       A.       B.       C.       D.       E.       F.       G.       H.       I. Which alternative should be selected?
 A. [Alternative A] B. [-44,483.50] C. [-269,275] D. [ Alternative B] E. [-627.5] F. [-1,300] G. [-253,627.50] H. [-23,000] I. [-108,784]

Let us consider alternative B

Calculate the present value of the maintenance costs for Alternative B.

Annual maintenance cost=O&M=-2300 AED

Periodic Cost=P=-10000 AED

Initial Cost=Co=-240000 AED

Present Value of maintenance cost for alternative B=O&M/i=-2300/10%=-23000 AED

Correct option is H) -23000

Calculate the Annual value of the periodic costs for Alternative B

Annual Cost of periodic Cost for alternative B=P*(A/F,10%,10)  Annual Cost of periodic Cost for alternative B=-10000*0.062745=-627.45 AED or -627.5 AED Correct option is E) -627.50

Calculate CC of Alternative B

Capitalized Cost of alternative B=Initial Cost+PV of maintenance cost+Annual periodic cost/i

Capitalized Cost of alternative B=-240000-23000-627.5/10%=-269275 AED

Correct option is C) -269275

Calculate the CC of Alternative A

Annualized Cost of alternative A=-20000*(A/P,10%,4)-5000+2000*(A/F,10%,4)   Annualized Cost of alternative A=-20000*0.315471-5000+2000*0.215471=-10878.48 AED

Capitalized cost of alternative A=Annualized Cost/i=-10878.48/10%=-108784.80 or -108,784 AED

Correct option is I) -108784

Which alternative should be selected?

Absolute value of capitalized is lower in case of alternative A. It is better.

Alternative A should be selected

Correct option is A) Alternative A

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