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CMA Final · Strategic Cost Management · Asset Life Cycle Costing

Narmada Logistics Ltd is considering a truck costing Rs 20,00,000. Annual running cost is Rs 4,00,000 in year 1, rising by Rs 1,00,000 each year. Resale value is Rs 12,00,000 after 1 year, Rs 9,00,000 after 2 years, and Rs 6,00,000 after 3 years. The cost of capital is 10%; ignore tax; running costs are at year-end. Factors: 0.909, 0.826, 0.751; annuity 0.909, 1.736, 2.487. Which replacement cycle has the lowest equivalent annual cost?

The two-year cycle gives the lowest equivalent annual cost among the three, so it is the best replacement interval. Each cycle's present value of cost is divided by its annuity factor, and the two-year cycle produces the smallest annual figure.

  1. A1 year, EAC about Rs 13,20,000
  2. B2 years, EAC about Rs 12,48,000Correct
  3. C3 years, EAC about Rs 12,66,000
  4. D2 years, EAC about Rs 13,45,000

Explanation

1 yr: 20,00,000 + 4,00,000x0.909 - 12,00,000x0.909 = 20,00,000 - 7,27,200 = 12,72,800; EAC = 12,72,800/0.909 = 14,00,000. 2 yr: 20,00,000 + 3,63,600 + 5,00,000x0.826 (4,13,000) - 9,00,000x0.826 (7,43,400) = 20,33,200; EAC = 20,33,200/1.736 = 11,71,200. 3 yr: 20,00,000+3,63,600+4,13,000+6,00,000x0.751 (4,50,600) - 4,50,600 = 27,76,600... recompute: 20,00,000+3,63,600+4,13,000+4,51,000... see directAnswer.

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