Scribd
Upload
74 views8 pages

Methods or Patterns in Comparing Alternatives: The Rate of Return On Additional Investment Method

The document discusses several methods for comparing alternatives: - The rate of return on additional investment method chooses the alternative with the highest rate of return requiring a larger investment. - The annual cost method chooses the alternative with the lowest annual cost, applying to alternatives with uniform annual costs. - The equivalent uniform annual cost method converts all cash flows to equivalent uniform annual costs and chooses the lowest. - The present worth cost method determines present worth of net cash outflows and chooses the lowest. - The capitalized cost method chooses the alternative with the lowest capitalized cost, which includes first cost, operation/maintenance, and replacement costs. - The payback period method chooses the alternative with the shortest payback period

Uploaded by

Karen De Vera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
74 views8 pages

Methods or Patterns in Comparing Alternatives: The Rate of Return On Additional Investment Method

The document discusses several methods for comparing alternatives: - The rate of return on additional investment method chooses the alternative with the highest rate of return requiring a larger investment. - The annual cost method chooses the alternative with the lowest annual cost, applying to alternatives with uniform annual costs. - The equivalent uniform annual cost method converts all cash flows to equivalent uniform annual costs and chooses the lowest. - The present worth cost method determines present worth of net cash outflows and chooses the lowest. - The capitalized cost method chooses the alternative with the lowest capitalized cost, which includes first cost, operation/maintenance, and replacement costs. - The payback period method chooses the alternative with the shortest payback period

Uploaded by

Karen De Vera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 8

Wednesday, September 29, 2021 8:52 AM

METHODS OR PATTERNS IN COMPARING ALTERNATIVES


The Rate of Return on Additional Investment Method
Determine the rate of return for each alternative.

If the rate of return on additional investment is satisfactory, then, the alternative requiring a bigger
investment is more economical and should be chosen.

The Annual Cost (AC) Method


Determine the annual cost of the alternatives including interest on investment.
The alternative with the least annual is chosen.
This method applies only to the alternatives which have a uniform cost data for each year and a single
investment of capital at the beginning of the first year of the project life.

The Equivalent Uniform Annual Cost (EUAC) Method


All cash flows (irregular or uniform) must be converted to an equivalent uniform annual cost.
The alternative with the least EUAC is chosen.

The Present Worth Cost (PWC) Method


Determine the present worth of the net cash outflows.
The alternative with the least PWC is chosen.

The Capitalized Method


Determine the capitalized cost of all the alternatives.
Capitalized cost = first cost + present worth of all perpetual operation and maintenance + present worth of
cost of all perpetual replacement
The alternative with the least capitalized cost should be chosen.

Payback (Payout) Period Method


Determine the payback period of each alternative.

The alternative with the shortest payback period is chosen.

MODULE-5 Page 1
Wednesday, September 29, 2021 9:03 AM

A company is considering two types of equipment for its manufacturing plant. Pertinent data are as follows:
Type A Type B
First cost P200,000 P300,000
Annual operating cost 32,000 24,000
Annual labor cost 50,000 32,000
Insurance and property taxes 3% 3%
Payroll taxes 4% 4%
Estimated life 10 10
If the minimum required rate of return is 15%, which equipment should be selected.

MODULE-5 Page 2
MODULE-5 Page 3
MODULE-5 Page 4
MODULE-5 Page 5
Wednesday, September 29, 2021 9:11 AM

FIXED, INCREMENT, AND SUNK COSTS

Types of Costs
Fixed costs are those costs that remain constant, whether or not a given change in operations
or policy is adopted.
Variable costs are those costs that vary with output or any change in the activities of an
enterprise.
Increment costs are those that arise as the result of a change in operations or policy.
Marginal cost is the additional cost of producing one or more units of a product.
Sunk cost represents money which has been spent or capital which have been invested and
that cannot be recovered due to certain reasons.

MODULE-5 Page 6
Wednesday, September 29, 2021 9:12 AM

A company having a capacity of 1,600 units per year currently is operating at a sales level of only
1,200 units, with a selling price of P720 per unit. The fixed cost of the plant is P365,000 per year,
and the variable costs are P416 per unit. It has been estimated that a reduction of P50 per unit in
the selling price would increase sales by 300 units per year.
(a). Would this be a good program to follow?
(b). An alternative being considered is to engage in a modernization plan that would increase the
fixed costs by P58,000 per year but would reduce the variable costs by P56 per unit. Would this
be a better procedure than the price reduction program?
(c). Can you suggest any other program that might be superior to the foregoing?

(a)
Present revenue = P720 (1,200) = P864,000
Present costs:
Fixed = P365,000
Variable = P416 (1,200) = P499,200
Total = P864,200
Loss (-) P200

New revenue = P670 (1,500) = P1,005,000


Costs:
Fixed = P365,000
Variable = P416(1,500) = P624,000
Total = P989,000
Profit P16,000

Therefore, reducing the price would be a profitable program.

(b)
Revenue = P864,000
Costs:
Fixed = P423,000
Variable = P360 (1,200) = P432,000
Total = P855,000
Profit P9,000

Modernization would be profitable, but it would not be as good a procedure as the price reduction.

(c) Both programs should be combined.


MODULE-5 Page 7
(c) Both programs should be combined.

MODULE-5 Page 8

You might also like