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Annual Cost

In: Business and Management

Submitted By pabrohbross
Words 902
Pages 4
For investments (purchases) of buildings and equipment, which are expected to last several years, it is reasonable to place their cost on an annual basis over several years, rather than a single year. Viewing cost on an annual basis allows easy comparison to anticipated changes in income or productivity that will be required to pay for the item.
For instance, if annual cost of a mix wagon is $3,000, then an equivalent increase in net milk income will cover its cost. For 100 cows at a n of $8/cwt of milk, that would et 350lbs/cow/year or slightly more than 1 lb/cow/day in milk. Furthermore, annual costs allows comparison or joint consideration of items having differing lengths of life.

The annual cost includes charges for depreciation (purchase price minus salvage value), interest on the money invested, repairs for normal use, property taxes, and insurance. Repairs, property taxes, and insurance are usually rough estimates by percentage of price, with increases in repairs assumed to offset decreases in the other two. Interest is often loosely accounted for multiplying an average value of the item by an interest rate (discount, opportunity, MARR). This is crude and can be improved by using time value of money to convert price and salvage to an annual cost, which includes automatically both depreciation and interest.
1. Purchase Price – to be annualized
2. Salvage Value – also to be annualized. Can be figured several ways, guessed, or ignored entirely if years of life are extended long enough. This does not require that one plans to actually sell the item in the end. Fortunately, salvage, when converted from future value to annual value, becomes quite small and often insignificant.
3. Repairs – estimated as a percentage of purchase price, therefore already annualized. This in reality a variable cost,...

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