2.4. Components Summary

Try these first

1. 1.

   What is the investment cost?

   Hint

   Think about the financial burden of owning machinery.

2. 2.

   What does depreciation mean?

   Hint

   Consider how a car loses value over the years.

3. 3.

   What are investment costs primarily concerned with?

   • Cost of maintenance
   • Annual cost of capital
   • Insurance premiums

   Hint

   Think about what owning equipment financially entails.

4. 4.

   Is it true that insurance costs always cover maintenance?

   • True
   • False

   Hint

   Consider the purpose of insurance.

5. 5.

   You are tasked with preparing a bid for a construction project. You must account for a piece of machinery costing $100,000, with a salvage value of$20,000, an expected useful life of 5 years, insurance costs of 2%, tax costs of 2.5%, and storage costs of 1%. Calculate the total ownership cost.

   Hint

   Break down your calculation into parts for clarity.

6. 6.

   A contractor is assessing the ownership cost of two machines. Machine A has an initial cost of $50,000 and a salvage value of$10,000 with a useful life of 10 years. Machine B costs $70,000 with a salvage value of$15,000 also over 10 years. Which machine has the lower total ownership cost when you consider taxes, insurance, and storage?

   Hint

   Apply the AAI formula for both machines.