2.3. Storage Costs

Try these first

1. 1.

   Define investment costs in your own words.

   Hint

   Think about purchase and any associated interest.

2. 2.

   What are storage costs?

   Hint

   Consider maintenance and security.

3. 3.

   What represents the annual cost of capital invested in a machine?

   • Operating Cost
   • Investment Cost
   • Maintenance Cost

   Hint

   Refer back to the definition of investment costs we discussed.

4. 4.

   True or False: The Average Annual Investment Method accounts for cash flow timings.

   • True
   • False

   Hint

   Remember our segmentation of these two methods.

5. 5.

   A construction company buys a crane for $120,000 and expects a salvage value of$15,000 after 10 years. Calculate the average annual investment. Discuss implications on project costs if this calculation is incorrect.

   Hint

   Utilize the average annual investment formula from our last class.

6. 6.

   A project manager mistakenly underestimates the storage costs of machinery. What steps should they take to reassess and correct the budget?

   Hint

   Revisit the cost components we discussed and analyze each.