Can anybody give me the solution to this illustration no.2 of CMA final study notes paper 15. I am a student of CMA final but I am not understanding the assumption of percentage used in calculation of both Exe. and Wye machine. Please give me solutions if any
Illustration 2.
A2Z p.l.c supports the concept of tero technology or life cycle costing for new investment decisions covering its
engineering activities. The financial side of this philosophy is now well established and its principles extended to all
other areas of decision making. The company is to replace a number of its machines and the Production Manager
is torn between the Exe Machine, a more expensive machine with a life of 12 years, and the Wye machine with an
estimated life of 6 years. If the Wye machine is chosen it is likely that it would be replaced at the end of 6 years by
another Wye machine. The patter of maintenance and running costs differs between the two types of machine
and relevant data are shown below:
Purchase price `19,000 ` 13,000
Trade-in value/brakeup/scrap ` 3,000 ` 3,000
Annual repair costs ` 2,000 ` 2,600
Overhaul costs (at year 8) ` 4,000 (at year 4) ` 2,000
Estimated financing costs averaged over machine life
10%p.a -Exe; 10% p.a. -Wye
You are required to: recommend with supporting figures, which machine to purchase, stating any assumptions
made.
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