2. Total Cost Calculation

So, now we have to find the equivalent annual cost for the third year of the purchase price 3500000 for year 3,

EAC = 0.4380 × 35,00,000 = 15,33,000 rupees

So like this you are going to calculate for all the years.

In this chunk, we start by calculating the equivalent annual cost (EAC) for the purchase price of a machine, which is 3,500,000 rupees. The first step is to identify the capital recovery factor for the third year, which is given as 0.4380. By multiplying this factor with the total purchase price, we get the equivalent annual cost for that year, which amounts to 1,533,000 rupees. This process is similar for calculating EACs for subsequent years.

Imagine you buy a car for 35,00,000 rupees. Each year, you want to know how much that car costs you in equivalent annual terms to understand your annual budget. Using the EAC, you can have a clearer picture of how much you pay every year based on the car's purchase price.

Now let us find the equivalent annual cost of the operating and the maintenance cost. So, how to find the equivalent annual cost let us go back to the cash flow diagram. So, this 1,13,200 is operating and maintenance cost at the end of year 1. Now you convert it into t = 0, how to convert it into t = 0, find the present worth?

So, find the present worth of 1,13,200, so that is a first step. Once you find the present worth of 1,13,200 then you can find its equivalent annual cost using uniform series capital recovery factor.

Here, we focus on the operating and maintenance costs. The cost of operating and maintenance for Year 1 is given as 113,200 rupees. To find this cost's equivalent annual value, we first convert it to its present worth at Year 0. This is done using the appropriate present worth factor. Finding the present worth allows us to understand how much that future payment is worth today. After finding the present worth, we can then calculate the EAC using the capital recovery factor.

Think about a house you own. If you plan to spend 1,13,200 rupees on roof repairs next year, you’d want to know what that future payment means today. By finding the present worth, you can grasp how that future cost compares to your current finances.

So, we are going to find the present worth of 1,13,200 that is your operating cost. So, you need to find P for the known F, i, n, P.W = 0.8696 This present worth factor you multiply it by the operating and maintenance cost.

Present worth value = 0.8696 × 1,13,200 = 98,438.72 rupees

Next, we calculate the present worth factor. Using the formula for the present worth, we find a factor of 0.8696 for 113,200 rupees using a known interest rate and the time period. We then multiply this factor by the operating and maintenance cost to get the present worth value of 98,438.72 rupees. This value represents how much you'd need today to cover that future operating cost.

If you know that your friend owes you 1,13,200 rupees in a year, you would want to know how much money that is worth if you wanted to invest it instead. By calculating the present worth with the factor, you can decide how much you'd rather have now rather than waiting for the payment.

Now you add the cumulative, so find the cumulative operating and maintenance cost. So, now, next thing is we are going to find the equivalent annual cost of the present worth of the operating and maintenance cost so how to calculate that?

In this step, we calculate the cumulative operating and maintenance cost over multiple years. After finding the present worth for each year, we add these values to get the total cumulative cost. We then look to determine the EAC for this cumulative operating and maintenance cost, which provides us insight into how much these costs would average out annually.

If you were to keep track of all your monthly subscriptions – for maybe a streaming service, gym, and magazine – you’d want to calculate how much those overall costs add up to over the year. It helps you understand your total spending.

Now let us find the equivalent annual cost of the resale value, that is your salvage value... First calculate the present value of the resale value... Present worth value = 0.8696 × 31,50,000 = 27,39,240 rupees

We also calculate the equivalent annual cost of the machine's resale value, which is an amount we expect to earn back after using the machine. To find this, we first calculate its present worth using a factor calculated similarly as before. For instance, if the resale value is 3,150,000 rupees, we find its present worth to be 27,39,240 rupees, which gives us a sense of what that future cash inflow is worth today.

If you buy a van for 3,150,000 rupees today and expect to sell it for something back in the future, calculating the present worth helps you understand how much you can save or invest from selling the van in today's terms.

So, how to find the total cost? So, you are supposed to add the purchase price and the operating and maintenance cost, your salvage value is in flow cash inflow, so you subtract it.

To find the total equivalent annual cost, we need to add up the equivalent annual costs of both the purchase price and the operating and maintenance costs, while subtracting the expected cash inflow from the resale value. This will give us a complete picture of what it costs to operate and maintain the machine annually along with its initial investment.

Think of it like budgeting for a year. You’ll add your annual rent (purchase price), utility bills (operating and maintenance costs) and then reduce that total by any expected income from subletting your apartment (resale value). This gives you a net annual expense.

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