5. Operating Cost Estimation

Try these first

1. 1.

   What is the formula for calculating Equivalent Annual Cost (EAC)?

   Hint

   Remember the components of the formula.

2. 2.

   Define Salvage Value.

   Hint

   Think about asset depreciation.

3. 3.

   What does EAC stand for?

   • Equivalent Annual Cost
   • Estimated Annual Cost
   • Equalized Asset Calculation

   Hint

   Think about investment recovery.

4. 4.

   True or False: Salvage value is always a fixed amount and does not change over the asset's life.

   • True
   • False

   Hint

   Consider how wear and tear affect assets.

5. 5.

   Calculate the total operating cost for a machinery project with an initial cost of ₹1,500,000, a salvage value of 10%, annual usage of 1,800 hours, and operational costs as outlined in the example.

   Hint

   Break the problem into parts: find EAC, calculate operating costs, and sum them up.

6. 6.

   Imagine a company has machinery with an initial investment of ₹2,500,000 and annual usage of 2,400 hours. If they also incur repair costs of ₹2,000 per month and insurance of 5% of initial cost annually, find the total operating cost.

   Hint

   Estimate repair costs per year and include in total operating costs.