Ocol Benmar ME40 (Engineering Economy)

Mfge - 2 April 01, 2019

Assignment

EQUIVALENT ANNUAL COST

1. As stated earlier, EAC allows managers to compare NPVs of different

projects over different periods, to accurately determine the best
option. Consider two alternative investments in machinery
equipment:

 Machine A has the following:

An initial capital outlay of $105,000
An expected lifespan of three years
An annual maintenance expense of $11,000

 Machine B has the following:

An initial capital outlay of $175,000
An expected lifespan of five years
An annual maintenance expense of $8,500

SOLUTION:

 Machine A: A(t,r) = (1 - (1 / (1 + 5%) ^ 3)) / 5% = 2.72

EAC Machine A = $105,000 / 2.72 + $11,000 = $49,557

 Machine B: A(t,r) = (1 - (1 / (1 + 5%) ^ 5)) / 5% = 4.33

EAC Machine B = $175,000 / 4.33 + $8,500 = $48,921

2. A firm can lease a truck for 4 years at a cost of $30,000 annually. It
can instead buya truck at a cost of $80,000, with annual
maintenance expenses of $10,000. The truck will besold at the end
of 4 years for $20,000. Which is the better option if the discount rate
is 10percent?

SOLUTION:

PV = -80,000-10,0001.10-1.10(1.10)4+20,000(1.10)4

= -80,000-10000[3.169865] + 13,600.27

= -80,000-31,698.65 + 13,600.27 = -98,038.38

𝑃𝑉
EAA = 1 1
−
𝑅 𝑅(1+𝑅)𝑁

−98,038.38
= 1 1
−
0.10 0.10(1+0.10)4

= -$30,928.25

The EAA of leasing is less than the EAA of buying ,so you’d
prefer to lease the truck
 3. A company bought a generator 10 years ago and its salvage
value is worth P30,000. If the company is planning to buy a
new one, they have three options. The generator is being
used 15 hrs per year. The fourth option is not to buy a
generator which would cost the company P20,000 per hour.

HD WE GE
200,000 170,000 190,000
40,000 20,000 29,000
5 years 7 years 6 years
12% 12% 12%
5000/hr 7000/hr 5900/hr

AO – P5,000 per hour

The generator is used 15 hours per year.
AO – (5000)(15)
AO – P75,000
HD
(1 + 𝑖)𝑛 (𝑖) (𝑖)
𝐴𝐸𝐶 = 𝐴𝑂 + 𝐶0 ( ) − 𝐶𝐿 ( )
(1 + 𝑖)𝑛 − 1 (1 + 𝑖)𝑛 − 1
(1 + 0.12)5 (0.12) (0.12)
𝐴𝐸𝐶 = 75,000 + 200,000 ( ) − 40,000 ( )
(1 + 0.12)5 − 1 (1 + 0.12 − 1

AE𝑪𝑯𝑫 = P124,185.56
WE

AO – (7000)(15)
AECWE = P140,267.66

GE
AO = (5900)(15)
AO = 88,5000
AECGE = P131,139.34

AE𝑪𝑯𝑫 is the lowest among the options. It is advisable to choose HD generator