5.

COST ANALYSIS

5–2 with Sinking Fund Depreciation

Annual Cost = annual depreciation cost + interest + operating cost

( )
Annual Cost = + F.C (i) + O.C.
( )

( )
where: Annual Depreciation, sinking fund =
( )

Interest = F. C. (i)

Operating Cost = O.C.

Sample Problem 5-2

A pipeline 6000 m long is to convey a sewage having some corrosive effect. Bids have been
received for reinforced concrete, cast iron and steel. Because of varying hydraulic qualities
of the inside surfaces the reinforced concrete was to be 36 in diameter, the cast iron pipe 42
in diameter and steel 45 in in diameter, The assumed length of life of the m aterials are 100,
75, and 50 years for cast iron, concrete and steel respectively. Annual maintenance costs
are assumed as ₱600 for cast iron, ₱900 for concrete and ₱3,600 for steel. The bids are
₱770,000 for reinforced concrete, ₱790,000 for cast iron and 580,000 for steel, how much is
this bid if money is worth 5%?

Given: pipeline 6000 m long

Concrete cast iron steel
Diameter 36 in 42 in 45 in
Life 75 yrs 100 yrs 50 yrs
Annual maintenance ₱900 ₱600 ₱3,600
Bids ₱770,000 ₱790,000 ₱580,000

Required: what bid is favorable

Solution:
( )
Annual Cost = + F.C (i) + O.C
( )

For concrete
( )
Annual depreciation = = 1,108
( )

Interest of FC = 0.05(770,000) = 38,500

Annual maintenance (O.C.) = 900

Annual cost (concrete)= annual depreciation + annual interest + annual maintenance

1 Annual Cost with Sinking Fund Depreciation

 = 1108 + 38500 + 900

= ₱40,418.00

For cast iron

( )
Annual depreciation = = 303.00
( )

Interest of FC = 0.05(790,000) = 39,500

Annual maintenance (O.C.) = 600

Annual cost (cast iron)= annual depreciation + annual interest + annual maintenance

= 303 + 39500 + 600

= ₱40,403.00

For steel pipe

( )
Annual depreciation = = 2,771
( )

Interest of FC = 0.05(580,000) = 29000

Annual maintenance (O.C.) = 3600

Annual cost (concrete)= annual depreciation + annual interest + annual maintenance

= 2771 + 29000 + 3600

= ₱35,371.00

Answer:

Steel is favorable.

2 Annual Cost with Sinking Fund Depreciation