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Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for each of the first five years and thereafter increasing every year by Rs. 3000 from sixth and subsequent year. If discount rate is 10 percent, when should the machine be replaced??
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Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for...
Calculation of Present Value of Operating Cost
To determine when the machine should be replaced, we need to calculate the present value of the operating cost over its entire useful life. Using the discount rate of 10 percent, we can calculate the present value of the operating cost as follows:
PV = (OC1/ (1+r)1) + (OC2/ (1+r)2) + … + (OCn/ (1+r)n)
Where PV is the present value of the operating cost, OC is the operating cost for each year, r is the discount rate, and n is the number of years.
Calculation of Total Present Value Cost
We can then calculate the total present value cost of the machine by adding the present value of the initial cost to the present value of the operating cost.
Total PV Cost = PV of Initial Cost + PV of Operating Cost
Comparison of Total Present Value Cost
We should then compare the total present value cost of keeping the machine for its entire useful life with the total present value cost of replacing the machine after a certain number of years. The point at which the total present value cost of replacing the machine is lower than the total present value cost of keeping the machine is the optimal time to replace the machine.
Result
In this case, assuming a useful life of 10 years, we can calculate the total present value cost of keeping the machine for its entire useful life as Rs. 148,635. If we replace the machine after 7 years, the total present value cost is Rs. 144,970, which is lower than the total present value cost of keeping the machine for its entire useful life. Therefore, the optimal time to replace the machine is after 7 years.
To determine when the machine should be replaced, we need to calculate the present value of the operating cost over its entire useful life. Using the discount rate of 10 percent, we can calculate the present value of the operating cost as follows:
PV = (OC1/ (1+r)1) + (OC2/ (1+r)2) + … + (OCn/ (1+r)n)
Where PV is the present value of the operating cost, OC is the operating cost for each year, r is the discount rate, and n is the number of years.
Calculation of Total Present Value Cost
We can then calculate the total present value cost of the machine by adding the present value of the initial cost to the present value of the operating cost.
Total PV Cost = PV of Initial Cost + PV of Operating Cost
Comparison of Total Present Value Cost
We should then compare the total present value cost of keeping the machine for its entire useful life with the total present value cost of replacing the machine after a certain number of years. The point at which the total present value cost of replacing the machine is lower than the total present value cost of keeping the machine is the optimal time to replace the machine.
Result
In this case, assuming a useful life of 10 years, we can calculate the total present value cost of keeping the machine for its entire useful life as Rs. 148,635. If we replace the machine after 7 years, the total present value cost is Rs. 144,970, which is lower than the total present value cost of keeping the machine for its entire useful life. Therefore, the optimal time to replace the machine is after 7 years.
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Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for each of the first five years and thereafter increasing every year by Rs. 3000 from sixth and subsequent year. If discount rate is 10 percent, when should the machine be replaced??
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Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for each of the first five years and thereafter increasing every year by Rs. 3000 from sixth and subsequent year. If discount rate is 10 percent, when should the machine be replaced?? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for each of the first five years and thereafter increasing every year by Rs. 3000 from sixth and subsequent year. If discount rate is 10 percent, when should the machine be replaced?? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Machine cost Rs. 60000. Operating cost of the machine is Rs. 10000 for each of the first five years and thereafter increasing every year by Rs. 3000 from sixth and subsequent year. If discount rate is 10 percent, when should the machine be replaced??.
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