Question

Calculate the total cost per hour to own the track dozer:

Purchase price: $550,000
Estimated salvage value $50,000
Useful life: 5 years
Annual usage: 2000 hours per year
Assume interest, insurance, and risk as 10%

Answer 1

Answer:

$68.45

Explanation:

initial outlay = $550,000

cash flow year 5 = $50,000

NPV = -$550,000 + $50,000/1.1⁵ = -$518,954

equivalent annual cost = NPV / PV annuity factor

PV annuity factor, 10%, 5 periods = 3.7908

equivalent annual cost = $518,954 / 3.7908 = $136,898.26

cost per hour = $136,898.26/2,000 hours = $68.45