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Cost Analysis: Ginger Washer vs. Grande

The document compares the costs of two washing machines, the Ginger Washer Machine and the Grande (Henan) machine, over their lifetimes using different capital budgeting methods. The Grande (Henan) machine has lower total annual costs, a higher rate of return on investment, lower present worth costs, and lower equivalent uniform annual costs, making it the more economical choice according to all the capital budgeting analysis methods.

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Ivy Joy Ubina
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65 views6 pages

Cost Analysis: Ginger Washer vs. Grande

The document compares the costs of two washing machines, the Ginger Washer Machine and the Grande (Henan) machine, over their lifetimes using different capital budgeting methods. The Grande (Henan) machine has lower total annual costs, a higher rate of return on investment, lower present worth costs, and lower equivalent uniform annual costs, making it the more economical choice according to all the capital budgeting analysis methods.

Uploaded by

Ivy Joy Ubina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ginger Washer Machine Grande (Henan) Manual Washing

First Cost 300,000 69,161.69 0

Salvage Value 20,000 0 0

Annual Operation 32,000 22,500 90,000

Annual Labor Cost 60,000 25,000 0

Annual Maintenance 5,000 8,000 0

Taxes and Insurance 12% 12% 0

Life, years 10 5 0

*Money is worth at least 10%

BY RATE OF RETURN ON ADDITIONAL INVESTMENT METHOD

Ginger Washer Machine

Annual costs:

Depreciation:

Machine:

300,000−20,000
d=
(1+0.1)10 −1
0.1
d=17,568.71
Operation 32,000

Labor & Salaries 60,000

Maintenance 5,000

Taxes & Insurance 36,000

Total Annual Cost 150,568.71

Grande (Henan)

Annual costs:

Depreciation:

Machine:
69,161.69
d=
(1+0.1)5−1
0.1
d=11,328.51
Operation 22,500

Labor & Salaries 25,000

Maintenance 8,000

Taxes & Insurance 8,299.40

Total Annual Cost 75,127.91

Annual savings 150,568.71-75,127.91=75,440.80

Additional investment 300,000-69,161.69=230,838.31

75,440.80
Rate of return on additional investment x 100%
230,838.31
=32.68%>10%

Grande (Henan) is more economical.

BY THE ANNUAL COST METHOD

Ginger Washer Machine

Annual costs:

Depreciation:

Machine:

300,000−20,000
d= 10
(1+0.1) −1
0.1
d=17,568.71
Operation 32,000

Labor & Salaries 60,000

Maintenance 5,000

Taxes & Insurance 36,000


Interest on Capital 30,000

Total Annual Cost 180,568.71

Grande (Henan)

Annual costs:

Depreciation:

Machine:

69,161.69
d=
(1+0.1)5−1
0.1
d=11,328.51
Operation 22,500

Labor & Salaries 25,000

Maintenance 8,000

Taxes & Insurance 8,299.40

Interest on Capital 6,916.17

Total Annual Cost 82,044.08

*Ginger washer machine>Grande (Henan)

Since annual cost of ginger washer machine is greater than that of the annual cost of Grande
(Henan) machine, grande (Henan) is more economical.
BY THE PRESENT WORTH COST METHOD

Use 10-year study period, which is the least common multiple of 10 and 5.

Ginger Washer Machine

Annual costs = 32,000+5,000+60,000+36,000=133,000

20,000

0 1 2 3 4 5 10

133,000 133,000 133,000 133,000 133,000 133,000

300,000 300,000

PWC= 300,000 + 133,000(P/A, 10%, 10) + 280,000(P/F, 10%, 10) -20,000 (P/F, 10%, 10)

=300,000+817,227.43 +107,952.12-7,710.87

=1,217,468.68
Grande (Henan)

Annual Cost=22,500+25,000+8,000+8,299.4=63,799.40

0 1 2 3 4 5 10

63,799.40 63,799.40 63,799.40 63,799.40 63,799.40 63,799.40

69,161.69 69,161.69 69,161.69

PWC = 69,161.69+ 63,799.40(P/A, 10%, 10) + 69,161.69 (P/F, 10%, 5) +69,161.69 (P/F, 10%, 10)

=69,161.69+392,019.69+42,943.97+26,664.83

=530,790.18

Grande (Henan) should be chosen, since its PWC is lesser than PWC of Ginger Washer Machine

BY THE EQUIVALENT UNIFORM ANNUAL COST METHOD

Ginger Washer Machine

20,000

0 1 2 10
0 1 2 1
0

133,000 133,000 133,000 EUAC EUAC EUAC


EUAC = 300,000 (A/P, 10%, 10) + 133,000– 20,000(A/F, 10%, 10)

= 48,823.62+133,000-1,254.91

=180,568.71

Grande (Henan)

0 1 2 5
0 1 2 5

0 1 2 1
63,799.40 63,799.40 63,799.40 EUAC EUAC
EUAC 0EUAC
EUAC EUAC

69,161.69

EUAC = 69,161.69 (A/P, 10%,5) + 63,799.40

= 18,244.68+63,799.40

=82,044.08

Grande (Henan) should be chosen, since EUAC of Grande (Henan) machine is less than the EUAC
of ginger washer machine.

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