CMA Final · Strategic Cost Management · Asset Life Cycle Costing
Anand Plastics buys a moulding machine for Rs 6,00,000. Operating cost is Rs 90,000 per year for 4 years and there is no salvage value. Discount rate is 10%; annuity factor for 4 years at 10% is 3.170. What is the equivalent annual cost (EAC), to the nearest rupee?
Equivalent annual cost is total present value of costs divided by the annuity factor. Total PV is 6,00,000 plus 2,85,300, equal to 8,85,300; dividing by 3.170 gives about Rs 2,79,274 per year.
- ARs 1,89,274
- BRs 2,79,274Correct
- CRs 2,25,000
- DRs 1,50,000
Explanation
PV of operating costs = 90,000 x 3.170 = 2,85,300. Total PV = 6,00,000 + 2,85,300 = 8,85,300. EAC = 8,85,300 / 3.170 = 2,79,274 (approx). Option with only purchase annualised (1,89,274) omits running costs.
Did you get it right without looking?
One question tells you little. A timed set on Asset Life Cycle Costing shows your real accuracy, how long you take and where you lose marks.
More Asset Life Cycle Costing questions
- Kaveri Textiles buys a machine for Rs 8,00,000. Annual operating cost is Rs 1,00,000 for each of 4 years (payable at year-end). Salvage valu…
- Which one of the following is treated as a part of the acquisition (pre-ownership) phase in asset life cycle costing, as opposed to the oper…
- Asset life cycle costing differs from product life cycle costing mainly because asset life cycle costing:
- Two machines are considered by Narmada Textiles at a 10% discount rate. Machine P costs Rs 5,00,000, runs 3 years with annual operating cost…
- Vishwa Plastics is comparing two machines on equivalent annual cost at 10%. Machine P has a present value of life cycle cost of Rs 6,34,000 …
- Kaveri Textiles is considering a machine costing Rs 10,00,000 with a 5-year life. Annual operating and maintenance cost is Rs 2,00,000 at th…