Annual Cost Essay examples

901 Words Dec 26th, 2015 4 Pages
ANNUAL COST
PURPOSE
For investments (purchases) of buildings and equipment, which are expected to last several years, it is reasonable to place their cost on an annual basis over several years, rather than a single year. Viewing cost on an annual basis allows easy comparison to anticipated changes in income or productivity that will be required to pay for the item.
For instance, if annual cost of a mix wagon is $3,000, then an equivalent increase in net milk income will cover its cost. For 100 cows at a n of $8/cwt of milk, that would et 350lbs/cow/year or slightly more than 1 lb/cow/day in milk. Furthermore, annual costs allows comparison or joint consideration of items having differing lengths of life.

CALCULATION CONCEPT
The annual cost
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It will admittedly, increase in amount over time, but be offset by decreasing taxes and insurance. If there are few moving parts, use 1 or 2%, otherwise up to 5 or 6% of price. 4. Property Taxes and Insurance – not always associated directly with the item. There may be no property taxes on it or the insurance currently in effect will cover the item at no additional cost, but both together are usually included at 1.5% of price.

5. MARR and Years of Life – MARR is the interest rate used to annualize the price and salvage. It normally is the rate, which could be earned, in an alternative safe investment. Higher rates could be used to make the annual cost look larger (more conservative approach). Years of life should be reasonable, with any real-life extensions for excellent care or good luck being a bonus beyond what was expected. Remember, years of life are also curtailed by obsolescence. One technique of calculation is to extend the years of life and ignore the salvage value, particularly on long -lived items.
Relating the DIRTI5 to Annual Cost
Depreciation
Interest
Repairs
Taxes
Insurance
Important Point – Annual Value of Purchase Price minus Annual Value of
Salvage takes care of depreciation and interest.
Annual Cost Example
Price:
Years of Life:
MARR:
Repairs:
Taxes and Insurance:
Salvage:

$10,000
10
10%
3%
1.5%
Double Declining Balance

Purchase Price:

Amortize over 10 years at 10% interest
$10,000 x (0.1627) = $1,627

Salvage Value:

Find a salvage…

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