Your organisation has decided to purchase an item of equipment expected to work 1700 hours per year

Fantastic news! We've Found the answer you've been seeking!

Question:

Your organisation has decided to purchase an item of equipment expected to work 1700 hours per year (average) for a 12 year working life.

(a) Discuss, in about 200 words, two methods you could use to compare alternative options when buying this equipment.

(b) Assume that the item of equipment you decided to purchase had a purchase price of $2,900,000 and a residual value at the end of 12 years of $260,000. Tabulate the depreciation and book value for the life of the item by each of the following methods:

1) straight line 2) declining balance 3) sum of digits.

(c) Tabulate details of a sinking fund to accumulate to the original purchase price less residual value assuming an interest rate of 6%. (20 marks)

(d) Draw a graph showing the book values in each of the above (plotted on the same graph for comparison). (20 marks)

(e) Comment on the factors that an equipment owner might consider when selecting one of these methods. (20 marks)

(f) Assume now that you have purchased this equipment. What is the Total Annual payment required for operating the equipment? You have the following additional data:

• Maintenance costs are $60,000 in the first year

• Operator wages are $100,000 in the first year

• Storage, transport and other miscellaneous costs are $15,000 in the first year

• Money costs 8% per year Hint: Start by calculating the Capital Recovery Factor (45 marks)

(g) Maintenance, operator and miscellaneous costs are expected to increase at a flat rate of 4% per year over the life of the machine. Based on a Profit margin of 32%, create a table that calculates the hourly charge out rate, including profit, you would need for its hire during each year of the working life of the equipment. (40 marks)

(h) Also based on this hourly charge and expected operating hours, what is the expected annual income over the working life of the equipment?