1.1. Understanding Investment Cost

Try these first

1. 1.

   What does investment cost represent?

   Hint

   Think about how investments may lead to costs.

2. 2.

   Define depreciation.

   Hint

   Consider how wear and tear affects value.

3. 3.

   What does investment cost refer to?

   • Only interest on loans
   • Opportunity cost of not investing
   • Annual cost of capital in machinery

   Hint

   Consider all costs of capital.

4. 4.

   True or False: The average annual investment method is more precise than the time value method.

   • True
   • False

   Hint

   Think about method accuracy and errors.

5. 5.

   A construction company is evaluating two different types of machinery. Machine A costs $80,000 to purchase and has an anticipated resale value of$10,000 after 10 years. Machine B costs $100,000 with a resale value of$20,000 after the same period. How does the average annual investment cost compare for each machine assuming a depreciation of straight line?

   Hint

   Calculate using average values over the lifespan of the machinery.

6. 6.

   You are considering purchasing an equipment set worth $150,000 with a salvage value of$25,000 expected to last for 15 years. If you use the time value method with a cost of capital of 5%, what are the total costs involved?

   Hint

   First find depreciation, then add possible costs from investment income missed.