Advanced: Evaluation of projects with unequal lives A2Z p.l.c. supports the concept of terotechnology or life cycle costing for new investment decisions covering its engineering activities. The financial side of this philosophy is now well established and its principles extended to all other areas of decision making.

The company is to replace a number of its machines and the Production Manager is tom between the Exe machine, a more expensive machine with a life of 12 years, and the Wye machine with an estimated life of 6 years. If the Wye machine is chosen it is likely that it would be replaced at the end of 6 years by another Wye machine. The pattern of maintenance and running costs differs between the two types of machine and relevant data are shown below.

You are required to

(a) recommend, with supporting figures, which machine to purchase, stating any assumptions made; (10 marks)

(b) describe an appropriate method of comparing replacement proposals with unequal lives;
(4 marks)

(c) describe life cycle costing and give the bene¬
fits that are likely to accrue from its use. Support your answer with examples of changes in practice that could occur from adopting this philosophy.

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Exe Wye () () Purchase price Trade-in value 19 000 13000 3.000 3000 Annual repair costs 2000 2600 Overhaul costs 4000 2000 (at year 8) (at year 4) Estimated financing costs averaged over machine life 10% p.a. 10% p.a.