Question

An automobile firm wants to purchase either machine A or machine B. The intial cost of machines A and B are $40,000 and $50,000, respectively. The power consumption per year of machines A and B are 120 MWh and 100 MWh, respectively. The power cost is $40/MWh. The estimated life of both machines is 10 ye $20,000 for machine B. According to the life-cycle costing approach, the overall cost of machines A and B are:

A. $88,000 and $98,000, respectively
B. 875,000 and $70,000, respectively
C. $118,000 and $110,000, respectively
D. $74,800 and $79,000, respectively
E. $110,000 and $120,000, respectively.

Answer 1

C. $118,000 and $110,000, respectively.

Explanation:

Please consider the complete question.

An automobile firm wants to purchase either machine A or machine B. The intial cost of machines A and B are $40,000 and $50,000, respectively. The power consumption per year of machines A and B are 120 MWh and 100 MWh, respectively. The power cost is $40/MWh. The estimated operating and maintenance cost over 10 years is $30,000 for machine A and $20,000 for machine B.

First of all, we will find the amount spent on power consumption for 10 years by each machine as:

`\text{Machine A}=10\cdot 120(\$40)\\\text{Machine A}=\$48,000`

`\text{Machine B}=10\cdot \$100(\$40)\\\text{Machine A}=\$40,000`

Now, we will find overall cost of machines A and B by adding initial cost, power consumption for 10 years and maintenance cost as:

`\text{Overall cost of machine A}=\$40,000+\$48,000+\$30,000`

`\text{Overall cost of machine A}=\$118,000`

`\text{Overall cost of machine B}=\$50,000+\$40,000+\$20,000`

`\text{Overall cost of machine B}=\$110,000`

Therefore, the overall cost of machines A and B are $118,000 and $110,000, respectively and option C is the correct choice.