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CMA Final · Strategic Cost Management · Asset Life Cycle Costing

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 over 4 years (annuity factor 3.170). Machine Q has a present value of life cycle cost of Rs 7,51,000 over 5 years (annuity factor 3.791). Which choice is correct?

Compare equivalent annual costs because the lives differ. Machine P costs 6,34,000 divided by 3.170, which is Rs 2,00,000 a year. Machine Q costs 7,51,000 divided by 3.791, about Rs 1,98,100 a year. Q is cheaper per year, so choose Q.

  1. AChoose Q, because its equivalent annual cost is Rs 1,98,100 against Rs 2,00,000 for PCorrect
  2. BChoose P, because its equivalent annual cost is Rs 2,00,000 against Rs 1,98,100 for Q
  3. CChoose P, because its total present value is lower
  4. DChoose Q, because it has the longer life

Explanation

EAC of P = 6,34,000 / 3.170 = 2,00,000. EAC of Q = 7,51,000 / 3.791 = approximately 1,98,100. Since lives differ, compare annual equivalents; Q is cheaper per year. Choosing P on total PV ignores unequal lives.

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