BUSF_A01.qxd

Appendix 4 • Suggested answers to selected problem questions

5.4 Livelong Ltd

Calculation of present cost of operating the machine for its expected life:

Machine

Alpha Beta

££

Initial cost 50,000 90,000

Salvage value:

5,000 ×0.683 (3,415)

7,000 ×0.513 (3,591)

Annual running costs:

10,000 ×3.170 31,700

8,000 ×4.868 38,944

Present cost (a) 78,285 125,353

Annuity factor (b) 3.170 4.868

Equivalent annual value (a)/(b) £24,696 £25,750

Where the equivalent annual cost of A is the same as B, then the present cost of operat-

ing A for four years would be £81,628 (that is, £25,750 ×3.170). Thus the initial cost would

be £53,343 (that is, £81,628 −£31,700 +£3,415), so the increase would be £3,343.

5.5 Mega Builders plc

(a) ‘Money’ cost of salaries, wages and materials

‘Real’ cost (p.a.) =£1.3m +£2.5m +£0.25m =£4.05m

20X6 £4.05m ×1.03 =£4.172m

20X7 £4.05m ×1.03 ×1.04 =£4.338m

Plant

£ 000 Tax effect

Cost (20X4) 6,000

20X4 WDA (25%) (1,500)

4,500

20X5 proceeds (2,500)

Balancing allowance 2,000 @ 30% =£600,000

or

WDV at 31 Dec. 20X4 4,500

Additions 100

4,600

20X5 WDA (25%) (1,150) @ 30% =£345,000

3,450

20X6 WDA (25%) (862.5) @ 30% =£258,750

2,587.5

20X7 proceeds Zero

Balancing allowance 2,587.5 @ 30% =£776,250

BUSF_Z03.qxd 11/19/08 10:33 Page 482