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QUESTION 22 A CNC milling machine has a purchase price of £120,000 and it is considered from an accounting standpoint to be depreciated to zero value over a period of 5 years
QUESTION 22 A CNC milling machine has a purchase price of £120,000 and it is considered from an accounting standpoint to be depreciated to zero value over a period of 5 years. If the machine is to be used for 2 shifts with each shift working for 37 hours/ week and 45 weeks/ year. What is the machine cost/hr which must be charged in order to amortise the costs over the 5 year period? Express your answer in £/ hour but just write the numerical answer rounded up to the nearest penny. To make the calculation simpler ignore the effects of compound interest, you can assume that over the 5 year period you will be required to pay back borrowed money for the machine purchase amounting to 8% interest on the sum borrowed
Expert Solution
22. Here the machine cost per hour will include depreciation and interest since other factors are not given.
Depreciation per year = (Purchase Price - salvage value)/Economic Life
Eonomic Life = 5 years, Salvage price = 0 and Purchase price = £120000
Depreciation per year = (120000-0)/5 = £24000
Depreciation per hour = per year depreciation/ no. of hours used = 24000/ (2*37*45) = 24000/3330 = £ 7.21
Total Interest = 0.08 *120000 = £9600
Interest per hour = 9600/3330 = £ 2.88
Therefore, machine cost per hour = £7.21 + £2.88 = £10.10 or to nearest penny it is equal to £10/hour.
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