American company wants to build huge Dam It will need 10000

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, 1-10% 1. Maintenance cost per yearInitial cost 750,000 $850,000 Cost per working hrM 25,000 Company1 Company 2 S6 $10,000 Calculate the annual cost for each company, if the annual budget available is $ 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)

Solution

Answers

Working

Company 1

Company 2

A

Cost per working hour

$                               4.00

$                       6.00

B = 10000 hours x 3 years

No. of hours for 3 years

30000

30000

C = A x B

Total cost of working hours

$                 1,20,000.00

$        1,80,000.00

D = per year x 3 years

Maintenance for 3 years

$                     75,000.00

$            30,000.00

E

Initial Cost

$                 7,50,000.00

$        8,50,000.00

F = C+D+E

Total Cost for 3 years

$                 9,45,000.00

$      10,60,000.00

G = F/3years

Average Annual cost

$                 3,15,000.00

$        3,53,333.33

---Since Annual Budget is $400,000, Company 1 is a better choice because it cost only $ 315,000 annually, and there will be surplus fund available of $ 85,000 per years (= $ 255,000 in 3 years)

---Working: calculation of Present Value Annuity factor of $1 at 10% for 3 years

Year

PV of 10%

1

0.909

2

0.826

3

0.751

Total

2.487

Answer

Company 1

Company 2

Total cost for working year per year

$                     40,000.00

$            60,000.00

Maintenance cost per year

$                     25,000.00

$            10,000.00

Total Annual Cost

$                     65,000.00

$            70,000.00

PV annuity factor of 10% for 3 years

2.487

2.487

Present value of future cost

$                 1,61,655.00

$       1,74,090.00

Initial Cost

$                 7,50,000.00

$        8,50,000.00

Future Equivalent of total cost

$                 9,11,655.00

$      10,24,090.00

Working

Company 1

Company 2

A

Cost per working hour

$                               4.40   [$4 + 10%]

$                       6.60 [$6 +10%]

B = 10000 hours x 3 years

No. of hours for 3 years

30000

30000

C = A x B

Total cost of working hours

$                 1,32,000.00

$        1,98,000.00

D = per year x 3 years

Maintenance for 3 years

$                     75,000.00

$            30,000.00

E

Initial Cost

$                 7,50,000.00

$        8,50,000.00

F = C+D+E

Total Cost for 3 years

$                 9,57,000.00

$      10,78,000.00

G = F/3years

Average Annual cost

$                 3,19,000.00

$        3,59,333.33

---No the decision will not be changed as the Company 1 still cost comparatively less than Company 2.

Working		Company 1	Company 2
A	Cost per working hour	$                               4.00	$                       6.00
B = 10000 hours x 3 years	No. of hours for 3 years	30000	30000
C = A x B	Total cost of working hours	$                 1,20,000.00	$        1,80,000.00
D = per year x 3 years	Maintenance for 3 years	$                     75,000.00	$            30,000.00
E	Initial Cost	$                 7,50,000.00	$        8,50,000.00
F = C+D+E	Total Cost for 3 years	$                 9,45,000.00	$      10,60,000.00
G = F/3years	Average Annual cost	$                 3,15,000.00	$        3,53,333.33