Plant Purchase, Installation and Replacement

Assignment 2: Plant Purchase, Installation and replacement
Name of the Student
Name of the University

Table of Contents
Answer to question 1:.............................................................................................................. 3
Answer to question 2:.............................................................................................................. 4
Answer to question 3:.............................................................................................................. 5
Answer to question 4:.............................................................................................................. 6
Answer to question 5:.............................................................................................................. 6
Introduction to costing.........................................................................................................6
Gaps Identified in life cycle costing......................................................................................6
Improving cost benefit balance............................................................................................7
Reference List.......................................................................................................................9

Answer to question 1:
The concept of annual worth (AW) is used in capital budgeting decision for comparing
alternatives with dissimilar lives under LCM assumptions. The AW value has to be calculated
for only one life cycle.
In case of comparison of several option, the highest AW will be chosen for most feasible
alternative. This is calculated as the difference between capital recovery and annual cost for
a given rate of return.
Degree A B C D
First Cost $10,000.00 $14,000.00 $20,000.00 $30,000.00
Annual Labour 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
Salvage Value $500.00 $700.00 $1,000.00 $1,500.00
(A/P,i%,n) 0.22960738 0.22960738 0.22960738 0.22960738
(A/F,i%,n) 0.12960738 0.12960738 0.12960738 0.12960738
Annual Worth -$11,731.27 -$11,423.78 -$10,462.54
-
$11,193.81
From the above table it has seen that AW for Degree C is highest compare to other
methods. Hence, as per Annual Worth method, Degree C should be considered here.
Again, the concept of Present Worth (PW) is utilised further to evaluate the viability of any
project considering the life span as well as discount factor. It converts all the earnings to
present value. According to PW technique, the project will be selected if it has maximum
PW.
Degree A B C D
First Cost
$
10,000.00
$
14,000.00
$
20,000.00
$
30,000.00
Annual Labour 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
Salvage Value
$
500.00
$
700.00
$
1,000.00
$
1,500.00
(P/A,i%,n) 4.35526069 4.355260699 4.35526069 4.35526069