3. Methods to Calculate Ownership Costs

Try these first

1. 1.

   What does investment cost include?

   Hint

   Think about borrowed funds and potential returns.

2. 2.

   What are the two primary methods of calculating ownership costs?

   Hint

   Recall the methods discussed.

3. 3.

   What is the purpose of the time value method?

   • To account for the price of the machinery only
   • To consider the timing of cash flows in calculations
   • To estimate the depreciation of assets

   Hint

   Remember, timing is key in financial decisions.

4. 4.

   The average annual investment method expresses ownership costs as a percentage of what?

   • True
   • False

   Hint

   Think about the lifespan of the equipment.

5. 5.

   A construction firm buys a machine for $300,000 with annual depreciation of$30,000 and has to pay $3,000 in insurance and$5,000 in taxes annually. Calculate the total ownership cost per year.

   Hint

   Add each of the relevant costs together.

6. 6.

   Using the AAI method, determine the average annual investment for a machine initially purchased for $400,000, expecting a salvage value of$80,000 over 8 years.

   Hint

   Apply the formula for calculating AAI carefully.