1. American company wants to build huge Dam. It will need 10,000 hours per year
ID: 2407681 • Letter: 1
Question
1. American company wants to build huge Dam. It will need 10,000 hours per year for 3 years to be completed. Two company offered to build the Dam with the following costs, 10% Cost per working hrMaintenance cost per year ntial cost 750,000 $850,000 25,000 S10,000 Company Company 2 S6 Calculate the annual cost for each company, if the annual budget available is S 400,000. Which company is the best choice? What is the future equivalent of total cost for each company? Calculate the annual cost for each company, if cost per working hours increased 10%. Did your decision changed by this modification with the same budget? a) b) c)Explanation / Answer
Solution: 1) a) Computation of Annual Cost for Each Company: Company 1: Particulars Amount Cost of working hours 40000 (10000*4) Maintenance Costs 25000 Intial Cost per year 250000 (750000/3) Total Annual Cost 315000 Company 2: Particulars Amount Cost of working hours 60000 (10000*6) Maintenance Costs 10000 Intial Cost per year 283333.3 (850000/3) Total Annual Cost 353333.3 The Company 1 is the best choice because the total annual cost of Company 1 is less than the Company 2. b) The rate of interest i.e. I is 10% So the future equivalent cost of two companies are: Company 1: Future Equivalent Cost [315000*(1.1)^3] 419265 Company 2: Future Equivalent Cost [353333.33*(1.1)^3] 470286.7 c) Annual cost of each company if working hours increased by 10% Company 1: Particulars Amount Cost of working hours 44000 (11000*4) Maintenance Costs 25000 Intial Cost per year 250000 (750000/3) Total Annual Cost 319000 Company 2: Particulars Amount Cost of working hours 66000 (11000*6) Maintenance Costs 10000 Intial Cost per year 283333.3 (850000/3) Total Annual Cost 359333.3 No, the decision will not change as increased in the working hours also increased the total annual cost of Company 2 in compare with Company 1
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