Skip to content

CMA Final · Strategic Cost Management · 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 Rs 1,00,000, and no salvage. Machine Q costs Rs 3,00,000, runs 2 years with annual operating cost Rs 1,50,000, and no salvage. Annuity factors at 10%: 2 years 1.736, 3 years 2.487. Equivalent annual cost of Machine P is closest to:

Machine P's equivalent annual cost is about Rs 3,01,000. Its present value of cost is Rs 5,00,000 plus Rs 1,00,000 times 2.487, giving Rs 7,48,700, and dividing by the three-year annuity factor of 2.487 converts this into an annual equivalent.

  1. ARs 2,01,000 per year
  2. BRs 3,01,000 per yearCorrect
  3. CRs 2,50,000 per year
  4. DRs 3,33,000 per year

Explanation

PV of cost of P = 5,00,000 + 1,00,000 x 2.487 = 7,48,700. EAC = 7,48,700 / 2.487 = about Rs 3,01,000. Rs 2,01,000 is obtained by dividing only the purchase cost... actually by omitting the purchase cost's annualisation; Rs 3,33,000 is the simple undiscounted average of 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.

Practise Asset Life Cycle CostingFree diagnostic mock

More Asset Life Cycle Costing questions