Depreciation scenario Your organisation has decided to purchasean item of equipment expected to work 1700 hours per year (average)for a 12 year working life. (a) Discuss, in about 200 words, twomethods you could use to compare alternative options when buyingthis equipment. (b) Assume that the item of equipmentyou decided to purchase had a purchase price of $2,900,000 and aresidual value at the end of 12 years of $260,000. Tabulate thedepreciation and book value for the life of the item by each of thefollowing methods: 1) straight line 2) declining balance 3) sum ofdigits. (c) Tabulate details of a sinking fund toaccumulate to the original purchase price less residual valueassuming an interest rate of 6%. (d) Draw a graphshowing the book values in each of the above (plotted on the samegraph for comparison). (e) Comment on the factors thatan equipment owner might consider when selecting one of thesemethods. (f) Assume now that you have purchased thisequipment. What is the Total Annual payment required for operatingthe equipment? You have the following additional data: •Maintenance costs are $60,000 in the first year • Operator wagesare $100,000 in the first year • Storage, transport and othermiscellaneous costs are $15,000 in the first year • Money costs 8%per year Hint: Start by calculating the Capital Recovery Factor (g) Maintenance, operator and miscellaneous costs areexpected to increase at a flat rate of 4% per year over the life ofthe machine. Based on a Profit margin of 32%, create a table thatcalculates the hourly charge out rate, including profit, you wouldneed for its hire during each year of the working life of theequipment. (h) Also based on this hourly charge andexpected operating hours, what is the expected annual income overthe working life of the equipment?
