Plant Purchase Installation and Replace

Running head: PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Plant purchase, Installation and replacement
Name of the Student:
Name of the University:
Authors Note:

1PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Table of Contents
Answer to Question 1......................................................................................................................2
a)..................................................................................................................................................3
b)..................................................................................................................................................3
c)..................................................................................................................................................4
Answer to Question 2......................................................................................................................5
Answer to Question 3......................................................................................................................6
1...................................................................................................................................................6
2...................................................................................................................................................7
Answer to Question 4......................................................................................................................7
Answer to Question 5......................................................................................................................8
Reference.......................................................................................................................................12

2PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 1
The significance that is held by the concepts of present worth
a) Present Worth-
With eh usage of a suitable and appropriate discounting rate the company must discount
the future estimated cash flows of the project. The purpose for discounting the cash flows
to be generated by the company is to ensure that the factors like inflation rates prevalent
in the country, the systematic risk of the investors of the company are factored in. after
the cash flow to be generated by the project has factored in these elements that are
capable of impacting them severely the company will be able to grasp the actual or the
real value that will be generated or will be accrued to it from the project (Ciroth et al.,
2015).
b) Internal rate of return-
The internal rate of return can be defined as the returns in terms of percentage that is
being generated by the project for the company. The cost of capital of the company must
always be less than the internal rate of return that is being generated from the project. The
cost of capital refers to the payment that the company needs to make to the lenders and
the financial institutions (Martinez-Sanchez et al., 2015). It is often seen that the net
present value FO a particular project is positive, but the amount of the returns generated
by it is less than the cost of the capital of the company. In such a case, the project will fail
to generate enough revenue to ensure the repayment of the debts of the company and at
the same time ensure that value is created for the stakeholders of the company.
c) Annual worth-

3PLANT PURCHASE, INSTALLATION AND REPLACEMENT
This method undertakes the determination of the value FO the cash flow or revenue that is being
generated by the project within a span of one year. This information is very crucial for the
purpose of capital budgeting decisions. The reason for this is that the management of the
company is able to identify the number of ear it will take to retrieve back the entire amount that
has been invested by the company in the project (Moreau & Weidema, 2015).
a)
Calculation of the Annual Worth of different Alternatives
Particular A B C D
Supply units 5000 5000 5000 5000
Sales price per unit $3.00 $3.00 $3.00 $3.00
Sales (1) $15,000.00 $15,000.00 $15,000.00 $15,000.00
Fixed Cost $10,000.00 $14,000.00 $20,000.00 $30,000.00
Capital Recovery Factor
0.2296073
8
0.2296073
8
0.2296073
8
0.2296073
8
(A/P,I,N) (2) $2,296.07 $3,214.50 $4,592.15 $6,888.22
Salvage value $500.00 $700.00 $1,000.00 $1,500.00
Sinking Fund factor
0.1296073
8
0.1296073
8
0.1296073
8
0.1296073
8
(A/F, I, N) (3) $64.80 $90.73 $129.61 $194.41
Annual Labor cost (4) $9,000.00 $7,500.00 $5,000.00 $3,000.00
Annual Power and maintenance cost
(5) $500.00 $800.00 $1,000.00 $1,500.00
Annual Worth (1-2+3-4-5) $3,268.73 $3,576.22 $4,537.46 $3,806.19
b)
Calculation of the Present Worth of different Alternatives
Particular A B C D

4PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Sales $15,000.00 $15,000.00 $15,000.00 $15,000.00
Less:
Annual Labor cost $9,000.00 $7,500.00 $5,000.00 $3,000.00
Annual Power and maintenance cost $500.00 $800.00 $1,000.00 $1,500.00
Depreciation $1,583.33 $2,216.67 $3,166.67 $4,750.00
Taxable Income $3,916.67 $4,483.33 $5,833.33 $5,750.00
Less:
Tax Payment $1,175.00 $1,345.00 $1,750.00 $1,725.00
Net Income after tax $2,741.67 $3,138.33 $4,083.33 $4,025.00
Add:
Depreciation $1,583.33 $2,216.67 $3,166.67 $4,750.00
Annual Cash inflow after tax $4,325.00 $5,355.00 $7,250.00 $8,775.00
Present value factor of Annuity 4.3553 4.3553 4.3553 4.3553
Present Value of cash inflow after tax $18,836.50 $23,322.42 $31,575.64 $38,217.41
Salvage Value $500.00 $700.00 $1,000.00 $1,500.00
Present value factor
0.5644739
3
0.5644739
3
0.5644739
3
0.5644739
3
Present value of salvage $282.24 $395.13 $564.47 $846.71
Fixed Cost (initial Investment) $10,000.00 $14,000.00 $20,000.00 $30,000.00
Present Worth $9,118.74 $9,717.55 $12,140.11 $9,064.12
c)
Calculation of IRR of different Alternatives
Particular A B C D
Year 0 -$10,000.00 -$14,000.00 -$20,000.00 -$30,000.00
Year 1 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 2 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 3 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 4 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 5 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 6 $19,336.50 $24,022.42 $32,575.64 $39,717.41
Internal Rate of Return 188% 166% 157% 126%

5PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 2
The numerator of the conventional bene fit cost ratio contains the net benefit that is possible for
the company to generate from the project by the company. The denominator of the formula
contains the total expense that is incurred by the company in respect of the project. On the other
hand, the numerator of the modified benefit cost ratio contains the revenue generated by the
project after adjusting the operating expenses and the maintenance expenses incurred by the
management in the project. Hence, the numerator only consists of the real and the net income
generated by the project and the denominator is left to represent the initial cost of the project
(Martinez-Sanchez et al., 2016).
The recommendation that is being made based on the result of the two methods is same. It
becomes irrelevant that the formula used by the two methods is different from each other. The
reason being that the numerator contains the revenue generated by the project and the
denominator contains the cost incurred in respect of the project. If the revenue of the project is
more than both the methods will yield an amount that will be greater than one. In addition, if the
expenses incurred in respect of the project are more than both the formula will yield an amount
that will be less than one. Hence, depending upon the results given out by any of the two method
it can be decided if the proposed project will be accepted by the management or not.
Conventional Benefit cost ratio value using Present worth method
Calculation of Conventional B/C Ratio Value using Present Worth method
Particulars Machine A Machine B
Fixed Costs $20,000.00 $30,000.00

6PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Salvage Value $2,000.00 $0.00
Annual receipt $150,000.00 $180,000.00
Annual Disbursement $138,000.00 $170,000.00
Present worth Factor of Annuity 6.144567106 6.144567106
Present worth Factor of Single payment 0.385543289 0.385543289
Present worth of benefit $921,685.07 $1,106,022.08
Present worth of annual disbursement $847,950.26 $1,044,576.41
Present value of salvage $771.09 $0.00
Initial Cost $20,000.00 $30,000.00
B/C Ratio value 1.06 1.03
Modified B/C Ratio value using Present worth benefit
Calculation of Modified B/C Ratio Value using Present Worth method
Particulars Machine A Machine B
Fixed Costs $20,000.00 $30,000.00
Salvage Value $2,000.00 $0.00
Annual receipt $150,000.00 $180,000.00
Annual Disbursement $138,000.00 $170,000.00
Present worth Factor of Annuity 6.144567106 6.144567106
Present worth Factor of Single payment 0.385543289 0.385543289
Present worth of benefit $921,685.07 $1,106,022.08
Present worth of annual disbursement $847,950.26 $1,044,576.41
Present value of salvage $771.09 $0.00
Initial Cost $20,000.00 $30,000.00
B/C Ratio value 3.83 2.05
Answer to Question 3
1.
Calculation of the After Tax Cash flow of the Leasing alternatives
Particulars 1 2 3 4 5 6 7 8 9 10

7PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Lease Cost 80000 60000 50000 50000 50000 50000 50000 50000 50000 50000
Other costs 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000
Total Costs 84000 64000 54000 54000 54000 54000 54000 54000 54000 54000
Tax savings on expenses 25200 19200 16200 16200 16200 16200 16200 16200 16200 16200
After Tax Cash Flow 58800 44800 37800 37800 37800 37800 37800 37800 37800 37800
2
Calculation of Equivalent Annual cost for the alternative ($)
Particulars 1 2 3 4 5 6 7 8 9 10
After Tax Cash Flow 56000 42000 35000 35000 35000 35000 35000 35000 35000 35000
PV factor 0.9091
0.826
4
0.751
3
0.683
0
0.620
9
0.564
5
0.513
2
0.466
5
0.424
1
0.385
5
PV of Cash flow 50909 34711 26296 23905 21732 19757 17961 16328 14843 13494
Net Present Value 239936
Annuity Factor
6.14456710
6
Equivalent Annual Leasing Costs 39048
Other costs 4000
Equivalent Annual Cost 43048
Answer to Question 4
Calculation of equivalent Annual cost of alternative options
Particulars Keep X Replace X with Y Replace X with Z
Initial Cost $0.00 $100,000.00 $160,000.00
Annual Maintenance and Operating
cost $90,000.00 $70,000.00 $60,000.00
Salvage Value $0.00 $30,000.00 $50,000.00
Pv Factor 0.3855433 0.385543289 0.385543289
PV of Salvage $0.00 $11,566.30 $19,277.16
Net Initial Cost $0.00 $88,433.70 $140,722.84
Annuity Factor 6.1445671 6.144567106 6.144567106
Equivalent Annual Cost $90,000.00 $84,392.18 $82,901.99

8PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 5
Introduction:
The company that is being currently studied is Tero Technology. The company is based in
Australia and commenced its operations in the year 1999. One of the main objectives of the
company is to deliver the customers with quality product at reasonable prices.
The present report deals with the utility that the life cycle costing provides to the management of
the company in respect of the creating value for its stakeholders. The tool ensures that the
management is able to monitor the costs incurred by it on a regular basis. Subsequently the
implementation by the same is riddled with certain gaps and the same will be illustrated in the
report. Pointing out the gaps in the implementation of the system is necessary because of the fact
that only by properly recognising them; it will be possible to alleviate them. Subsequent to that,
required recommendation will be made to the management for the purpose of proper integration
of the system into the operations of the company (Sakao & Lindahl, 2015).
Gaps that have been identified in the system:
It is a near impossible job to completely alleviate the gaps that are present in the accounting and
management tools being used by the management of the company. The gaps arise due to the
presence of several factors that influence these in a continuous basis. These factors may or may
not be identical in case of different organisation using the same tool. The presence of these gaps

9PLANT PURCHASE, INSTALLATION AND REPLACEMENT
in the in the accounting and the management tools used by the company must not be a hindrance
in their usage by the management of the company. Instead, honest and rigorous efforts must be
made in the part of the management to eradicate the gaps present within these accounting tools.
The proper discovery of the gaps in the accounting and management tool used by the company is
not for the purpose of deciding whether the company should make use of such tools or not rather
to find ways in which these gaps can be eradicated by the management of the company (Strazza
et al., 2015). These are the following gaps present in the life cycle costing tool used by the
management:
a) For the purpose of determination or indicating the nominal cash flows of the company,
nominal rates must be used by the company. On the other hand, in case of the actual rates
usage by the company the management must factor in the variations in the price level
index. There are also many other factors that should be factored in by the company like
the effects that the fluctuating inflation rates have on the decisions and the elements of
the tools used by the company.
b) The various sources from which the company arranges the funds for its various projects
undertake several systematic risks. In return, of this systematic risk undertaken by them,
they demand good and justifiable return from the company. Hence, these systematic
returns must also be factored in by the company (Al-Yafei et al., 2017).
c) For the determination of the weights to be used by the management in the use of the
accounting and the management tool utilised by the company, the market values of the
financial sources used by the company must be utilised. In case the market information
regarding the values is absent, the available accounting information available with the
management must be utilised for the same purpose.

10PLANT PURCHASE, INSTALLATION AND REPLACEMENT
d) The discounting rate that is being presently used by the management is not stagnant or
fixed. In other words, there are several factors that are continuously affecting the
discounting rates used by the company. The factors affecting the discounting rates may or
may not be in the control of the management. For instances the factors affecting the
discounting rate may range from items like capital structure of the company, the
estimated cash flow of the company and the systematic risk that is borne by the investors
of the company (Auer et al., 2017).
The various recommendations to the management in respect of cost/ benefit and risk
management:
For the purpose of maintaining sustainability in the operations of the management, it is of
utmost importance that the management undertakes regular and continuous monitoring of the
costs that are incurred by it for conducting the various operations of the company. The
accounting and management tools used by the management for the purpose FO decision
making and execution of the operations will yield results only if the company undertakes
continuous monitoring of its operations. The maintenance and upgradation of the internal
controls of the company is needed to ensure that the operations of the management do not
lead to unnecessary leakage of funds and create returns for the stakeholders of the company.
Hence, some of the recommendations to be made to the management are as follows:
a) The management of the assets that are currently under the process of development must
be objectively analysed by the management. For the purpose, FO conducting an objective
analysis of these assets the management must make sure to weigh in the further costs to
be incurred for their development and the expected revenue to be generated by them in
the future.

11PLANT PURCHASE, INSTALLATION AND REPLACEMENT
b) The weights to be used by the management for the purpose of conducting the capital
budgeting decisions of the project must be based upon the market value of the financial
resources used up by the company.
c) The management must make use of the discounting rates that take into consideration the
various fluctuations in the inflation rates of the economy of the company, the factors
influencing the future cash flows of the company and most importantly the internal and
the external factors that can affect the operations of the company (Di Giuseppe et al.,
2017).
Conclusion:
The cost implications of the decisions taken up by the management of the company greatly
influences the revenue and the cash flow that is going to be generated by the company in the
future alongwith the returns that the company is going to earn for the stakeholders of the
company. For the considering, the cost implications of the decisions to be taken up by the
management the company must ensure to factor in the returns created for the stakeholders. The
management must also develop an understanding regarding the importance of the decisions taken
up by it in respect of the fixed assets to be acquired by it. The reason for the significance of the
fixed assets and the corresponding decisions is that the fixed assets are going to be used by the
management for the purpose of generation of revenue and cash flow of the company in the
future. Hence, the management must integrate the usage of the modern accounting and
management tools available with it for managerial decision-making. Tools such as the life cycle
costing play a vital role in determining the efficiency of the decisions taken up by the
management.

12PLANT PURCHASE, INSTALLATION AND REPLACEMENT
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