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Business · Accounting
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A production manager wants to upgrade the manufacturing system by adding a new machine. He found that one of two machines can effectively be used; their cost data are given in Table Q3  below:

                                         Table Q3 Alternative Machines

Cost Element

M/C I

M/C II

First cost

Anual Maintenance

Operating cost/hr

Useful life

Salvage value

£150,000

£3000

£1.6

6 years

£10,000

£250,000

£3500

£1.2

8 years

£25,000

   Using an interest rate of 15%  per year compounded annually, answer the following:

  1. What is the yearly working hours that make the two machines even? Comment.   [10 Marks]
  2. Use the uniform annual costs to determine the more economical machine considering the machines work for 10 hrs/day, and 250 working hrs per year.  Comment on using the EUAW to make the comparison.   
  3. Use the sum-of-year digits and declining balance depreciation approaches  to compare the depreciation charges over the 8-years life of machine II.   
  4. Using the information in part (ii) above, if the MARR is 18%, which machine would be preferred?   

2. A service company works in a major international airport runs fleet vans to transport people inside the port. New vans cost $50,000 and depreciated at a declining balance rate of 30%. Due to the continuous work of the van, the maintenance costs amount to $3000 in the first year; and double each year the fan is used such that the maintenance costs of year t are twice that of year (t-1) for t = 2,3,..8.  Given a MAAR of 8%, find the economic life of a van

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