How can we calculate the annual cost of a generator? Given that a generator costs P 80,000 with an annual maintenance cost of P 9,000, a useful life of 12 years, and a salvage value of P 5,000 at an interest rate of 8%, how can we determine the annual cost?

Question

How can we calculate the annual cost of a generator?     Given that a generator costs P 80,000 with an annual maintenance cost of P 9,000, a useful life of 12 years, and a salvage value of P 5,000 at an interest rate of 8%, how can we determine the annual cost?

Marianne · Answer

Calculation of the Annual Cost of the Generator     To calculate the annual cost of the generator, we need to consider the initial cost, annual maintenance cost, salvage value, and the interest rate.     Initial cost (P) = 80,000     Annual maintenance cost (A) = 9,000     Useful life (n) = 12 years     Salvage value (S) = 5,000     Interest rate (r) = 8% or 0.08                   Calculation Process         To calculate the annual cost, we can use the formula for the annual cost of owning and operating an asset:         Annual Cost = (Initial cost - Salvage value + Annual maintenance cost) * (Interest rate / (1 - (1 + Interest rate)^(-Useful life))                  Plugging in the values, we have:         Annual Cost = (80,000 - 5,000 + 9,000) * (0.08 / (1 - (1 + 0.08)^(-12)))                  Simplifying the equation:         Annual Cost = 84,000 * (0.08 / (1 - 1.08^(-12)))         Annual Cost = 84,000 * (0.08 / (1 - 0.49718))         Annual Cost = 84,000 * (0.08 / 0.50282)         Annual Cost = 84,000 * 0.15907         Annual Cost = 13,364.88                  Therefore, the annual cost of the generator is approximately P13,364.88.

Determining the Annual Cost of a Generator

How can we calculate the annual cost of a generator?

Calculation of the Annual Cost of the Generator

Calculation Process

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