Quiz #5

Name: _____________________ Date: ___________

Section: _______

Instructions: Answer the following problems on a clear sheet of bond/yellow paper. Show
complete solution and box your final answer to receive full credit. No need to copy the problem
statements.

1. Four years ago, an ore-crushing unit was installed at a mine has an original cost of
P90,000. This unit was estimated to have a life of 6 years and zero appraisal value at the
present. The quantity of ore handled is to be doubled therefore requires an augmentation
on the old unit for a cost of P60,000 extending its life an additional four years. Annual
operating cost for this unit is P12,060 and a salvage value of P10,800. A unit that will
handle the same capacity of the one now in use can be installed for P80,000. Its life is
estimated at 6 years, annual operating costs are estimated at P4,500 and an estimated
salvage value at its retirement age of P9,600. Interest rate is 20%. Annual taxes and
insurance are 2.5% of the original cost. Should the old unit be augmented or replaced?
Use rate of return on additional investment method

Old unit

Annual Cost:

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1
𝑖
(60,000) − (90,000)(0.12)
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 4,954.722697
(1 + 0.2)6 − 1
0.2
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 = 12,060
𝑇𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 = (0.025 ∗ 90,000) = 2,250
Total annual cost = 4,954.722697+ 12,060+ 2,250= 19,264.7227
 New unit

Annual Cost:

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1
𝑖
80,000 − 9,600
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = ₱7,089.684509
(1 + 0.2)6 − 1
0.2
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 = ₱4,500
𝑇𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 = (0.025 ∗ 80,000) = ₱2,000
Total annual cost = 7,089.684509+ 4500+ 2,000= 13,589.68451
Annual Savings = 19,264.7227 - 13,589.68451= 5,675.038191
Additional investment = 80,000 - 60,000 = 20,000

5,675.038191
𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 = ∗ 100% = ₱𝟐𝟖. 𝟑𝟕𝟓%
20,000
2. Two electrical motors are being considered to power an industrial hoist. Pertinent data
for each motor are as follows:

Motor A Motor B
Investment P 25,000 P 32,000
Cost of operation per kW-hr P 0.72 P 0.70
Maintenance per year P 400 P 600
Life, years 10 10

Money is worth 20%. What would be the consumption, in kW-hr, have to be before Motor
B is favored over Motor A? Use annual cost method

Motor A
Annual Cost:
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1
𝑖
25,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = ₱963.0689221
(1 + 0.20)10 − 1
0.20
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 = 0.72𝑥
𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 = ₱400
 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 25000 ∗ 0.20 = ₱5,000
Total annual cost = 963.0689221+0.65x+400+5000 = 6,363.0689221+0.72x

Motor B
Annual Cost:
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1
𝑖
32,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = ₱1,232.72822
(1 + 0.20)10 − 1
0.20
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 = 0.70𝑥
𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 = ₱600
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 32000 ∗ 0.20 = ₱6,400
Total annual cost = 1,232.72822+0.70x+6,400 = 8232.72822+0.70x
Net annual cost = 0 =6,363.0689221+0.72x = 8232.72822+0.70x
X = 93482.96 kW-hr