Scribd
Upload
70 views1 page

Cost Analysis for Equipment Purchase

The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

Uploaded by

Afiq de Winner
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
70 views1 page

Cost Analysis for Equipment Purchase

The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

Uploaded by

Afiq de Winner
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Eg. 1.

The survey firm of Myers, Anderson, and Pope (MAP) LLP is considering the purchase of a piece of new
GPS equipment. Data concerning the alternative under consideration are presented below.

Initial outlay (year 0) $28,000


Annual Income $13,000
Annual Operating Costs $2,500 in year 1 and increase by $1000 each yr
Annual Insurance expenses $500
Recalibration at the end of year 4 $4,000
Salvage Value 10% of initial outlay

If the equipment has a life of eight years and MAP’s MARR is 5%,

a. Calculate the annual equivalent revenues (Total Revenues)


TR = Annual income + Salvage value = 13,000 + (0.1 x 28,000 (A/F, 5%,8) = 13,293.16

b. Calculate the annual equivalent cost (Total cost)


Initial outlay = 28,000(A/P, 5%, 8) = 4,331.6
Operating cost = 2500 + 1000(A/G,5%,8) = 5,744
Insurance = 500
Recalibration end of year 4 = 4,000(P/F, 5%, 4)(A/P, 5%, 8) = 418.8
TC = 10,994

c. Based on your answer in (a) and (b) above, should MAP purchase the equipment?
Profit = TR – TC = 13,293 – 10,994 = 2,299 Yes

Eg. 2 Ronald McDonald decides to install a fuel storage system for his farm that will save him an estimated 6.5
cents/gallon on his fuel cost. He uses an estimated 20,000 gallons/year on his farm. Initial cost of the
system is $10,000 and the annual maintenance the first year is $25 and increases by $25 each year
thereafter. After a period of 10 years the estimated salvage is $3,000. If money is worth 12%, is it a wise
investment?

Annual equivalent cost = 10,000(A/P, 12%, 10) + 25 + 25(A/G, 12%, 10) = $1,884.63
Annual equivalent savings/revenues = 20,000(.065) + 3,000(A/F, 12%, 10) = $1,471.00
Annual equivalent worth = -$413.63 ∴ not a wise investment

Eg.3 Calculate the AW for the following cash flow. Assume the MARR is 12% per year
Year Amount
Initial investment 0 8 million
Initial investment 1 5 million
Annual operating cost 1-8 0.9 million
Salvage value 8 0.5 million

Method I:
Annual Worth = [- 8 - 5(P/F,12%,1)](A/P,12%,8) – 0.9 + 0.5(A/F,12%,8)
= [-8.0-5.0*(.8929)](.2013) - 0.9 + 0.5*(.0813)
= $-3.37 million

Method II:
CR = [-8.0 - 5.0(P/F,12%,1) + 0.5(P/F,12%,8)](A/P,12%,8)
= [-8.0-5.0*(.8929) + 0.5*(.4039)](.2013)
= $-3.37 million

You might also like