MREGC5001 Plant Purchase, Installation, Replacement Solution

This assignment provides a detailed solution to a finance homework problem involving plant purchase, installation, and replacement decisions. It explains and applies the concepts of Annual Worth (AW), Present Worth (PW), and Internal Rate of Return (IRR) to evaluate different degrees of automatio...Read More

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

9 9 9
(P/F,i%,n) 0.56447393 0.56447393 0.56447393 0.56447393
Present Worth
$ -
51,092.74
$ -
49,753.53
$ -
45,567.09
$ -
48,751.96
The above table has shown that Degree C has the highest PW and thus it will be selected.
Finally, the initial rate of return (IRR) is the most useful technique in capital budgeting
decision, as it considered all time value of money constraints. This is a specific rate, where
the NPV of any proposed project/investment will be zero. According to IRR, if the rate is
higher than rate of return, then the project will be financially feasible. In case of multiple
alternatives, project/option with highest will be chosen. According to the IRR calculations,
Degree A will be chosen as it has the highest IRR compare to rest three alternatives.
IRR
Degree A 37%
Degree B 31%
Degree C 28%
Degree D 19%
Answer to question 2:
The benefit and cost ratio (BCR) explains the association between costs as well as benefits of
any project. This method is used to assess the project cost and benefits considering both
qualitative and quantitative aspects. However, in case of qualitative factors, these are
converted to financial terms to perform this calculation. It is the proportion of discounted
benefits and discounted costs for given discounting factor. In case of modified benefit cost
ratio, the operating and maintenance cost is subtracted from the benefits and then the
proportion is calculated.
For the given two options, the Benefit cost ratios are as follows:
BCR
Machine A 106.28%
Machine B 102.93%
Since, Machine A has the highest BCR, it should be selected to produce greater revenue.

Answer to question 3:
Year 0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Year
9
Year
10
Annual
Cash
flow of
Leasing
800
00
600
00
500
00
500
00
500
00
500
00
500
00
500
00
500
00
500
00
Tax
shield
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
70.0
%
Periodi
c after-
tax
cash
flows of
lease
560
00
420
00
350
00
350
00
350
00
350
00
350
00
350
00
350
00
350
00
Cost of
capital 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
After
tax cost
of
capital 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07
Discoun
ting
factor
0.93
457
9
0.87
343
9
0.81
629
8
0.76
289
5
0.71
298
6
0.66
634
2
0.62
275
0.58
200
9
0.54
393
4
0.50
834
9
Present
value of
leasing
523
36.4
5
366
84.4
3
285
70.4
3
267
01.3
3
249
54.5
2
233
21.9
8
217
96.2
4
203
70.3
2
190
37.6
8
177
92.2
3
Total
Present
Value
27156
5.593
3
Hence, the equivalent annual cost of leasing is $271565.59

Answer to question 4:
According to the given information, there are three options available, keep X, replace X with
Y and replace X with Z.
Considering all three option, in order to choose which one would be viable option, present
worth analysis has been taken place as mentioned below:
Degree Keep X
Replace X
with Y
Replace X
with Z
Book Value
$
20,000.00
$
1,20,000.00
$
1,60,000.00
Annual operating and maintenance
costs
$
90,000.00
$
70,000.00
$
60,000.00
Salvage Value
$
-
$
30,000.00
$
50,000.00
(P/A,i%,n)
6.14456710
6 6.144567106 6.144567106
(P/F,i%,n) 0.56447393 0.56447393 0.56447393
Present Worth
$ -
5,73,011.04
$ -
5,33,185.48
$ -
5,00,450.33
According to the present worth analysis, highest PW will be considered as the most feasible
option. Hence, Replace X with Z would be considered here.
Answer to question 5:
Introduction to costing
Cost bookkeeping is the way toward deciding and aggregating the cost of item or
movement. It is a procedure of representing the incurrence and the control of cost. It
likewise covers characterization, investigation, and translation of cost. At the end of the day,
it is an arrangement of bookkeeping, which gives the data about the ascertainment, and
control of expenses of items, or administrations. It quantifies the working effectiveness of
the venture. There is a relationship among data needs of administration, cost bookkeeping
targets, and procedures and devices utilized for investigation in cost bookkeeping.
Gaps Identified in life cycle costing
Life cycle costing (LCC) is characterized in the International Organization for Standardization
standard, Structures and Constructed Assets, Service-life Planning, Part 5: Life-cycle Costing

(ISO 15686-5) as a "monetary appraisal considering all concurred anticipated critical and
pertinent cost streams over a period of examination communicated in money related
esteem. The anticipated expenses are those expected to accomplish characterized levels of
execution, including unwavering quality, wellbeing and accessibility."
The utilization of LCC is basic to show that acquisition procedures and choices need to move
past considering the price tag of a decent or on the other hand benefit, at the buy cost does
not mirror the budgetary and non-monetary profits that are advertised by earth and socially
best resources as they gather amid the activities and utilize stages of the benefit life cycle
(Lanen, 2016).
However, there are several research works that identified that LCC has several issue or gap
while applying to current scenario. The first and foremost gap in LCC is that any decision
taken considering this LCC will lead paying more upfront (Ellul et al. 2015). In a few nations,
the generation of maintainable and LCC-proficient products and ventures is still embryonic,
which implies that the best way to source maintainable options will be through costly
imports or paying a high cost premium to fortify baby neighbourhood businesses. In bring
down pay economies, this distinction can be higher, as much as 10 to 50 for each penny. In
time, in any case, the substantial volumes requested by open obtainment contracts can
make economies of scale more attainable, and the costs of these items can be relied upon
to diminish as more makers enter the market. Moreover, open procurers can start to utilize
their solid market situating to arrange mass rebates as the advertise starts to develop (Taleb
et al. 2015).
Another important gap in LCC is that the capital as well as revenue budgets are conflicting in
terms of organisation’s nature as well as time frame. There is additionally the issue of
spending proprietorship, in other words, split duties regarding capital and working costs.
While obtainment contracting may be the obligation of one organization, spending plans are
controlled by another and the utilization and upkeep of the item/benefit/advancement has
a place with yet another (Christ and Burritt, 2015). As the advantages of SPP collect amid the
undertaking life and at its end transfer, those bearing the capital expenses may not be the
first to understand the advantages of reasonable options. Further, there are issue related
application of LCC due to insufficient amount of research.
Improving cost benefit balance
The crucial legitimization for the use of money saving advantage examination (all the more
effectively social cost advantage investigation, however we overlook that capability for
effortlessness) is that it permits arrangement producers to evaluate whether an undertaking
conveys picks up in monetary productivity (Bierer et al. 2015). The thought of effectiveness
being evoked here is that depicted by the Hicks-Kaldor paradigm: in particular that a
venture is an change over the present state of affairs on the off chance that it is feasible for
those that advantage from the venture to repay those that lose, and still be in an ideal

situation themselves. The Hicks-Kaldor measure is on the other hand known as the potential
Pareto change model or basically the pay guideline (Just et al., 2005).
A fruitful advantage cost investigation produces believable outcomes at a level of detail that
is proper for its expected utilize and the task's level of examination (Rieckhof et al. 2015).
The underlying arranging exercises ought to characterize a typical structure for contrasting
the impacts of an Alternative against the Base Case. Vital components to characterize right
on time in the examination procedure incorporate the interstate situations to be dissected,
the begin and end a very long time for the investigation, the geological zone considered, and
the approach that will be utilized to break down movement conduct. It is fundamental that
all choices be produced and investigated to a similar level of detail; this ought to be
represented in the arranging stage (Ladabaum et al. 2017). A typical system can be set up by
finishing the accompanying below process:
An initial phase in setting up a structure for the examination is to characterize the
motivation behind the advantage cost investigation. Recognizing the motivation behind the
investigation characterizes the level of detail suitable for the examination. Two different
factors additionally help characterize the fitting level of detail: accessible information and
investigation spending plan. Accessible information fluctuates by task and impacts the level
of detail proper for the advantage cost investigation. Information sources go from
customary building techniques to modern provincial travel request models. The accessibility
of this information differs with each undertaking. Advantage cost examination arranging
ought to set up what information is accessible, and after that check that the accessible
information suits the investigation reason and gives the proper level of detail for the
advantage cost investigation. The investigation spending impacts the suitable level of detail
too. The level of detail ought to be reliable all through the investigation (the same for the
Base Case and Alternatives) and comparable with the accessible spending plan.

Reference List
Bierer, A., Götze, U., Meynerts, L. and Sygulla, R., 2015. Integrating life cycle costing and life
cycle assessment using extended material flow cost accounting. Journal of Cleaner
Production, 108, pp.1289-1301.
Christ, K.L. and Burritt, R.L., 2015. Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production, 108, pp.1378-1389.
Ellul, A., Jotikasthira, C., Lundblad, C.T. and Wang, Y., 2015. Is historical cost accounting a
panacea? Market stress, incentive distortions, and gains trading. The Journal of
Finance, 70(6), pp.2489-2538.
Ladabaum, U., Mannalithara, A., Rachocki, C., Laleau, V., Garcia, D., Chen, E., Grimes, B.,
Vittinghoff, E. and Somsouk, M., 2017. Prospective Cost-Accounting of an Outreach Program
to Increase Fecal Immunochemical Test (FIT)-Based Colorectal Cancer (CRC) Screening
Among Underinsured Persons in a Randomized Trial. Gastroenterology, 152(5), p.S75.
Lanen, W., 2016. Fundamentals of cost accounting. McGraw-Hill Higher Education.
Rieckhof, R., Bergmann, A. and Guenther, E., 2015. Interrelating material flow cost
accounting with management control systems to introduce resource efficiency into
strategy. Journal of Cleaner Production, 108, pp.1262-1278.
Taleb, M.A., Gibson, B. and Hovey, M., 2015. Fifty years of Sustainability Accounting: does
accounting for income in business sustainability really exist?. International Journal of
Accounting and Financial Reporting, 5(1), pp.36-47.