6.2. Comparison of Methods

Try these first

1. 1.

   What is the formula for converting initial costs into an annualized cost?

   Hint

   Look for the capital recovery factor formula.

2. 2.

   What does salvage value represent?

   Hint

   Think about what is left of an asset after depreciation.

3. 3.

   What is the purpose of the uniform series capital recovery factor?

   • To calculate total equipment costs
   • To convert a one-time cost to annual cost
   • To calculate profits from machinery

   Hint

   Focus on the term 'convert' in the context of costs.

4. 4.

   True or False: Salvage value is always zero at the end of a machine's useful life.

   • True
   • False

   Hint

   Think about whether anything of value can remain after use.

5. 5.

   A construction firm has a heavy machine service life of 15 years with an initial cost of ₹25,00,000 and an expected salvage value of 10%. Calculate the annualized cost and the hourly depreciation if used for 2000 hours a year.

   Hint

   First find the annualized cost using the recovery factor, then use these values to calculate hourly depreciation.

6. 6.

   Assuming an interest rate of 7% and an initial cost of ₹1,00,00,000 for new machinery, find the total cost to own including an insurance rate of 1.5% over 10 years. Include all calculation steps.

   Hint

   Apply the capital recovery factor and account for insurance in your calculations.