1 You are planning to purchase a range and have to make a choice among the follo
ID: 2454760 • Letter: 1
Question
1 You are planning to purchase a range and have to make a choice among the following three models: Model 1 Model 2 Model 3 Cash cost $ 5,000 $ 5,500 $ 5,300 Estimate life 5 years 5 years 5 years Trade-in value at end of life $ 1,000 $ 1,200 $ 800 Cash from sale of old machine $ 200 $ 200 $ 200 Installation of new machine $ 75 $ 100 $ 100 Initial training cost in year 1 $ 350 $ 300 $ 250 Annual maintenance contract $ 300 $ 275 $ 200 Annual cost of supplies $ 200 $ 200 $ 200 Annual wage costs of employees $32,000 $32,000 $32,000
Explanation / Answer
Answer:
Statement of Evaluation to select which model would be the best investment
Particulars
Model 1
Model 2
Model 3
A.
Life of Model
5 Years
5 Years
5 Years
B.
Cost of Model
$5,000
$5,500
$5,300
C.
Trade In Value at end of life
$1,000
$1,200
$800
D.
Net Cost of Model (B-C)
$4,000
$4,300
$4,500
E.
Net Annual Cost of Model (D/Life)
$800
$860
$900
F.
Installation Cost
$75
$100
$100
G.
Initial Training Cost
$350
$300
$250
H.
Annual Maintenance Cost
$300
$275
$200
Total Annual Cost (E+F+G+H)
$1,525
$1,535
$1,450
From the above statement, Model 3 is looking more economical, since the annual cost under Model 3 is minimum, hence Model 3 would be the best investment.
Note 1: Cash from sale of old machine, Annual Cost of Supply & Annual wage costs of employees are not relevant for decision making, since the value/cost under each alternative/model is same.
Particulars
Model 1
Model 2
Model 3
A.
Life of Model
5 Years
5 Years
5 Years
B.
Cost of Model
$5,000
$5,500
$5,300
C.
Trade In Value at end of life
$1,000
$1,200
$800
D.
Net Cost of Model (B-C)
$4,000
$4,300
$4,500
E.
Net Annual Cost of Model (D/Life)
$800
$860
$900
F.
Installation Cost
$75
$100
$100
G.
Initial Training Cost
$350
$300
$250
H.
Annual Maintenance Cost
$300
$275
$200
Total Annual Cost (E+F+G+H)
$1,525
$1,535
$1,450
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