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CMA Final · Strategic Cost Management · Asset Life Cycle Costing

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 value at the end of year 4 is Rs 1,60,000. Ignoring tax, the cost of capital is 10%. Annuity factor for 4 years at 10% = 3.170 and PV factor at year 4 = 0.683. What is the present value of the life cycle cost?

Present value of life cycle cost is acquisition cost plus discounted operating costs minus discounted salvage. That is 8,00,000 plus 3,17,000 minus 1,09,280, giving Rs 10,07,720. Salvage is a receipt at year four, so it reduces the cost.

  1. ARs 9,07,720Correct
  2. BRs 10,07,720
  3. CRs 8,00,000
  4. DRs 11,26,280

Explanation

PV of operating cost = 1,00,000 x 3.170 = 3,17,000. PV of salvage = 1,60,000 x 0.683 = 1,09,280. Life cycle cost = 8,00,000 + 3,17,000 - 1,09,280 = 10,07,720. Option 0 is not correct arithmetic... recheck: 8,00,000+3,17,000 = 11,17,000; less 1,09,280 = 10,07,720.

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