Lang Industrial Systems Company (LISC) is trying to decide between two different
ID: 2702036 • Letter: L
Question
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $268,000, has a four-year life, and requires $82,000 in pretax annual operating costs. System B costs $378,000, has a six-year life, and requires $76,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 35 percent and the discount rate is 10 percent.
Calculate the EAC for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $268,000, has a four-year life, and requires $82,000 in pretax annual operating costs. System B costs $378,000, has a six-year life, and requires $76,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 35 percent and the discount rate is 10 percent.
Explanation / Answer
After calculating the EAC you%u2019ll have an amount in dollars, pounds, yen or whatever currency your project is using.
But what does this amount mean? The EAC predicts what you expect the total cost of the project to be.
Example of Calculating Estimate At Completion
Lets see some examples.
Example 1
Frank is the project manager for a software development company based in London. He is managing a project to create a new recipe sharing social network.
The project recently hit problems when the development team discovered that the software architecture they were going to use is not valid. After discussions the team has decided on a new approach.
The PMO has asked for a new estimate of the total cost of the project.
The project has already spent $210,000 and has a CPI of 1.1.
After talking with the teams on the project, he determined that the remaining costs are development %u2013 $50,000, quality assurance %u2013 $30,000 and documentation %u2013 $10,000.
What is the Estimate At Completion?
Answer: The Estimate At Completion is $300,000.
How did we calculate this?
In this example, the original estimates are bad because they are based on a flawed architecture approach.
Therefore, we will calculate Estimate At Completion using the formula from scenario one:
Estimate At Completion = Actual Cost + Bottom-up Estimate To Complete
Knowing this we can calculate: $210,000 + ($50,000 + $30,000 + $10,000) = $300,000
Example 2
Tim is the project manager for an undersea cable company based in Cyprus. He is managing a project to lay an optical fiber cable from Naples to Palermo.
The PMO has asked for an updated estimate of the total cost of the project.
At the start of the project, the costs of the project were estimated as $1,600,000 for design and permitting, $18,750,000 for optical fiber costs, $4,500,000 for installation and $2,300,000 for testing of the cable.
The Cost Performance Index of the project is currently 1.08.
What is the Estimate At Completion?
Answer: The Estimate At Completion is $25,138,888.89
How did we calculate this?
In this example, the CPI is not considered abnormal.
Therefore, a formula using CPI can be used.
So we will calculate Estimate At Completion using the formula from scenario two:
Estimate At Completion = Budget At Completion / Cost Performance Index
Knowing this we can calculate: ($1,600,000 + $18,750,000 + $4,500,000 + $2,300,000) / 1.08 = $25,138,888.89
Example 3
Gill is the project manager for a software company based in New York. She is managing a project to create a new accounting software package.
During construction, the team realized that mistakes were made while collecting requirements.
The mistake has now been fixed and a risk mitigation plan put in place.
During a review of the project, the PMO has asked for an updated estimate of the total cost of the project.
At the start of the project, the costs of the project were estimated as $200,000 for design, $300,000 for development, $200,000 for quality assurance.
The project has spent $400,000 so far. The value of the work completed is $500,000.
What is the Estimate At Completion?
Answer: The Estimate At Completion is $600,000
How did we calculate this?
In this example, the CPI is considered abnormal.
So we will calculate Estimate At Completion using the formula from scenario three:
Estimate At Completion = Actual Cost + (Budget At Completion %u2013 Earned Value)
Knowing this we can calculate: $400,000 + ($700,000 %u2013 $500,000) = $600,000
Example 4
Rajesh is working on a project to create a new inventory management system for a food manufacturer in Sheffield, England.
The CEO has told the shareholders that the new system will be in place in six months, without discussing this first with the PMO.
At the start of the project, the costs of the project were estimated as $150,000 for design, $700,000 for development, $225,000 for quality assurance.
The project has spent $450,000 so far. The value of the work completed is $375,000. The CPI for the project is 0.83 (CPI = $375,000 / $450,000) and the SPI is 0.8.
What is the Estimate At Completion?
Answer: The Estimate At Completion is $1,510,606.06
How did we calculate this?
In this example, the project has to meet a deadline.
So we will calculate Estimate At Completion using the formula from scenario three:
Estimate At Completion = Actual Cost + [(Budget At Completion - Earned Value) / (Cost Performance Index X Schedule Performance Index)]
Knowing this we can calculate:
= $450,000 + [($1,075,000 - $375,000) / (0.83 X 0.8)]
= $450,000 + [$700,000 / 0.66]
= $450,000 + $1,060,606.06
= $1,510,606.06
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.