Question

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]

Answer 1

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