Homework Answers
Company A:
First Cost - $ 15000
Add: Maintenance & Repairs - 1600*4 = 6400
Less: Annual Benefit - 8000*4 = 32000
Less: Salvage Value = 3000
Net Effective Cost = - 13600 i,e. savings of $ 13600 over the period of 4 years.
Incremental ROR = 13600/4 = 3400 p.a.
i.e. 3400/15000 = 22.66% p.a,
Future Worth = $ 13600.
Payback Period,
Assuming revenues are earned equally over the period of time
15000/ (8000-1600) = 2.34 years
Benefit to cost ratio:
Annual Benefit = 8000
Annual Cost = 1600
Annual Amortisation of fixed cost = 3750
Annual amortization of salvage value = 750
Benefit to cost = (8000+750) : (1600+3750)
=8750:5350
Company B:
First Cost - $ 25000
Add: Maintenance & Repairs - 400*4 = 1600
Less: Annual Benefit - 13000*4 = 52000
Less: Salvage Value = 6000
Net Effective Cost = - 31400 i,e. savings of $ 31400 over the period of 4 years.
Incremental ROR = 31400/4 = 7850 p.a.
i.e. 7850/25000= 31.40% p.a,
Future Worth = $ 31400.
Payback Period,
Assuming revenues are earned equally over the period of time
25000/ (13000-400) = 1.98 years
Benefit to cost ratio:
Annual Benefit = 13000
Annual Cost = 400
Annual Amortisation of fixed cost = 6250
Annual amortization of salvage value =1500
Benefit to cost = (13000+1500) : (6250+400)
=14500:6650
Company C:
First Cost - $ 20000
Add: Maintenance & Repairs - 900*4 = 3600
Less: Annual Benefit - 9000*4 = 36000
Less: Salvage Value = 4500
Net Effective Cost = - 16900 i,e. savings of $ 16900 over the period of 4 years.
Incremental ROR = 16900/4 = 4225 p.a.
i.e. 4225/20000= 21.125% p.a,
Future Worth = $ 16900.
Payback Period,
Assuming revenues are earned equally over the period of time
20000/ (9000-900) = 2.47 years
Benefit to cost ratio:
Annual Benefit = 9000
Annual Cost = 900
Annual Amortisation of fixed cost = 5000
Annual amortization of salvage value = 1125
Benefit to cost = (9000+1125) : (5000+900)
=10125:5900
Company B:
First Cost - $ 35000
Add: Maintenance & Repairs - 400*4 = 1600
Less: Annual Benefit - 13000*4 = 52000
Less: Salvage Value = 6000
Net Effective Cost = - 21400 i,e. savings of $ 31400 over the period of 4 years.
Incremental ROR = 21400/4 = 5350 p.a.
i.e. 5350/35000= 15.28% p.a,
Future Worth = $ 21400.
Payback Period,
Assuming revenues are earned equally over the period of time
35000/ (13000-400) = 2.77 years
Benefit to cost ratio:
Annual Benefit = 13000
Annual Cost = 400
Annual Amortisation of fixed cost = 8750
Annual amortization of salvage value =1500
Benefit to cost = (13000+1500) : (8750+400)
=14500:9150
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