Problem with solution:

Q2 2015/2016: Using the sum of the year digit method, find the hourly owing and
operating cost at the end of each year for an equipment described below:
Initial cost = $ 145,000 ,Salvage value = $ 25,000, Expected life of 5 years.
hp = 160 , c = 7 gallon , t = 100 hours , f = 0.75 , i% = 0.15 ,
M & R cost = 0.85 * total depreciation. Engine work by petrol
End of Year 1 2 3 4 5
No. of working hours 2,100 2,100 1,900 1,800 1,600
Solution:
1) Ownership and investment cost:
Year Digit
Dn   (Initial cost  Salvage value)
Sum of Year Digit
5  (5  1)
Sum of Year Digit   15
2
5 4
 D1   (145,000  25,000)  40,000,D 2   (145,000  25,000)  32,000
15 15
3 2
D3   (145,000  25,000)  24,000, D 4   (145,000  25,000)  16,000
15 15
1
D5   (145,000  25,000)  8,000
15
Year Deprciation Book value Investment cost
0 - 145,000 -
1 40,000 105,000 21750
2 32,000 73,000 15750
3 24,000 49,000 10950
4 16,000 33,000 7350
5 8,000 25,000 4950
2) Operating cost:
a) M & R cost:
Total M & R cost  0.85  (145,000  25,000)  102,000
n
M & R cost for each year is given by ´ Total M & R cost
Sum of Year's digit
M & R Cost (1) = (1/ 15)  102,000 = 6,800
M & R Cost (2) = (2/ 15)  102,000 = 13,600
M & R Cost (3) = (3/ 15)  102,000 = 20,400
M & R Cost (4) = (4/ 15)  102,000 = 27,200
M & R Cost (5) = (5/ 15)  102,000 = 34,000

(b) Fuel Cost:

 Q = 0.06  160  0.75 = 7.2 gal. / hr
= 7.2  4.25 = 30.6 litre / hr
Cost per hour  30.6  0.58  17.75 $/hr
(c) Oil Cost:
0.006  160  0.75 7
Q   0.1673 gal/hour  0.1673  4.25  5  3.56 $/hour
7.4 100
 Hourly Owing and Operating Cost:
40000  21750  6800
cost / hour (1)   17.75  3.56  53.95 $ / h
2100
32,000  17,120  15,750
cost / hour (2)   17.75  3.56  52.2 $ / h
2100
24,000  13,440  10,950
cost / hour (3)   17.75  3.56  46.78 $ / h
1900
16,000  9,760  7,350
cost / hour (4)   17.75  3.56  39.7 $ / h
1800
8,000  6,080  4,950
cost / hour (5)   17.75  3.56  33.204 $ / h
1600
Q.5 2015/2016: Using the Stright Line method, find the hourly owing and operating
cost at the end of each year for an equipment described below:
Initial cost = $ 130,000 ,Salvage value = $ 15,000, Expected life of 5 years.
hp = 170 , cranck capacity = 8 gallon , t = 100 hours , f = 0.8 , i% = 0.16 , Engine work
by diesel. M & R cost = 0.95 * total depreciation.
End of Year 1 2 3 4 5
No. of working hours 2,100 2,000 1,900 1,800 1,800
Solution:
1) Ownership and investment cost:
Initial cost  Salvage value 130,000  15,000
Dn    23,000
N.O year 5
Year Deprciation Book value Investment cost
0 - 130,000 -
1 23,000 107,000 20,800
2 23,000 84,000 17,120
3 23,000 61,000 13,440
4 23,000 38,000 9,760
5 23,000 15,000 6,080

2) Operating cost:
a) M & R cost:
Total M & R cost  0.95  (130,000  15,000)  109,250
 Total M & R cost
M & R cost for each year is given by
N
Year 1 2 3 4 5
M & R cost 21850 21850 21850 21850 21850

(b) Fuel Cost:

Q = 0.04  170  0.8 = 5.44 gal. / hr
= 5.44  4.25 = 23.12 litre / hr
Cost per hour = 23.12  0.58 = $ 13.41 / hr
(c) Oil Cost:
Q = [(0.006  170  0.8 )/7.4] + (8 /100) = 0.19 gal. / hr
= 0.19  4.25 = 0.81 litre /hr
Cost per hour = 0.81  5 = $ 4.1 / hr
 Hourly Owing and Operating Cost:
23000  20800  21850
cost / hour (1)   13.41  4.1  48.64 $ / h
2100
23000  17120  21850
cost / hour (2)   13.41  4.1  48.36 $ / h
2000
23000  13440  21850
cost / hour (3)   13.41  4.1  48.1 $ / h
1900
23000  9760  21850
cost / hour (4)   13.41  4.1  47.7 $ / h
1800
23000  6080  21850
cost / hour (5)   13.41  4.1  45.65 $ / h
1800