CMA Final · Strategic Cost Management · Asset Life Cycle Costing
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 the end of each year, and salvage value at the end of year 5 is Rs 1,00,000. Discount rate is 10%. Annuity factor (5 years) is 3.7908 and the discount factor for year 5 is 0.6209. The present value of life cycle cost is closest to:
Present value of life cycle cost is about Rs 16,96,000: purchase Rs 10,00,000 plus discounted running costs of Rs 7,58,160, less discounted salvage of Rs 62,090. Salvage is an inflow at the end of life, so it reduces the total cost of ownership.
- ARs 16,96,000Correct
- BRs 17,58,000
- CRs 17,20,000
- DRs 18,00,000
Explanation
PV of running costs = 2,00,000 x 3.7908 = 7,58,160. PV of salvage = 1,00,000 x 0.6209 = 62,090. Life cycle cost = 10,00,000 + 7,58,160 - 62,090 = 16,96,070. Ignoring salvage gives 17,58,160, which is wrong because salvage reduces the net cost.
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