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:


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=24000023000627.5/10%=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*0.3154715000+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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