7. Cost of Investment
The chapter discusses the various components of ownership costs for machinery, focusing on the cost of investment as a key factor in determining overall ownership costs. It highlights two main methods for calculating investment costs: the time value method and the average annual investment method. Additionally, the chapter covers related costs like insurance, taxes, and storage, concluding with an example to illustrate how to estimate the ownership costs.
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Sections
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1.2.11. Time Value Method
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1.2.22. Average Annual Investment Method
What we have learnt
- Ownership costs consist of depreciation, investment cost, insurance, taxes, and storage costs.
- The average annual investment method provides an approximate estimation for ownership costs.
- Investment costs can be based on both borrowed funds and company assets, influenced by interest rates.
Key Concepts
- -- Cost of Investment
- The annual cost associated with capital invested in machinery, including considerations of interest rates whether borrowed or from company assets.
- -- Time Value Method
- A method of calculating investment costs that accounts for cash flows occurring at different times by converting them to a present value.
- -- Average Annual Investment Method
- An approximate method used to estimate the cost of investment based on the average value of machinery over its useful life.
- -- Ownership Costs
- Costs that encompass depreciation, investment costs, insurance, taxes, and storage related to machinery ownership.
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