Question

7. On an investment company there are two alternatives to execute the civil work for a high tension transmission line. The first one is by 15 hand labor with an annual wage bill of 15000 $ and with other expenses the total cost will be 20000 $ per year and the project duration expected to be 6 years in this case. The second alternative is to buy a machine for 22000 S and reduce the labor force to 6 men including the driver and the cost for labors are 9000 $ per year. The maintenance of the machine is estimated to be 800 $ and 1000 $ after 2 and 4 years respectively and it will have a savage value of 800 S. Which scheme is best economically if the interest rate is 20%?.

Answer 1

There are two investment proposals. We will select that proposal which provides us maximum benefit and less cost as the case may be.
Proposal 1		Annual cost ($)
	15 hand labor	15000
	Other costs	20000
	Total cost	35000
	6-year cost	210000
Proposal 2	Cost of machinery	22000
	Interest is paid on capital borrowed fund	4400
	Labor cost for 6 labor	9000
	Total cost	13400
	6-year cost	80400
	- Salvage VALUE	-800
	Maintainance cost	1800
	capital repayment	22000
	Net cost for the project	103400
	It is better to opt proposal 2 as it is required less investment as compare with proposal 1