Engineering Economic Analysis

(Chris Devlin) #1

(^298) OTHER ANALYSISTECHNIQUES



  • 9-39 A project has the following costs and benefits. What
    is the payba~kperiod?
    Year Costs
    o $1400
    1 500
    2 300
    3-10


Benefits

$400
300 in each year
9-40 A car dealer presently leases a small computer with
software for $5000 per year. As an alternative he could
purchase the computer for $7000 and lease the soft-
ware for $3500 per year. Any time he would decide to
switch to some other computer system he could can-
cel the software lease and sell the computer for $500.
If he purchases the computer and leases the software,
(a)What is the payback period?
(b)If he kept the computer and software for 6 years,
what would be the benefit-cost ratio, based on a
10% interest rate?
A large project requires an investment of $200 mil-
lions. The construction will take 3 years: $30 million
will be spent during the first year, $100 million dur-
ing the second year and $70 million during the third
year of construction. Two project operation periods
are being considered: 10 years with the expected net
profit of $40 million per year and 20 years with the
expected net profit of $32.5 million per year. For sim-
plicity of calculations it is assumed that all cash flows
occur at end of year. The company minimum required
return on investment is 10%.
Calculate for each alternative:
(a) The payback periods
(b) The total equivalent investment cost at the end of
the construction period
(c) The equivalent uniform annual worth of the
project (use the operation period of each alter-
native)

Make your recommendations based on the foregoing
economic parameters.
Two alternatives are being considered:

9-41

9-42


Initial cost
Uniform annual cost
Useful life, in years

A
$500
200
8

B
$800
150
8

Both alternatives provide an identical benefit.
(a) Compute the payback period if Alt. B is pur-
chased rather than Alt.A.

9-44

l


9-43

(b) Use a MARR of 12% and benefit-cost ratio anal-
ysis to identify the alternative that should be
selected.
Tom Sewel has gathered data on the relative costs of
a solar water heater system and a ~onventional elec-
tric water heater. The data are based on statistics for
a mid-American city and assume that during cloudy
days an electric heating element in the solar heating
system will provide the necessary heat.
The installed cost of a conventional electric wa-
ter tank and heater is $200. A family of four uses an
average of 300 liters of hot water a day, which takes
$230of electricity per year. The glass-lined tank has
a 20-year guarantee. This is probably a reasonable
estimate of its actual useful life.
The installed cost 'of two solar panels, a small
electric pump, and a storage tank with auxiliary elec-
tric heating element is $1400. It will cost $60-a year
for electricity to run the pump and heat water on
cloudy days. The solar system will require $180 of
maintenance work every 4 years. Neither theconven-
tional electric water heater nor the solar water heater
will have any salvage value at the end of their useful
lives.
(a)Using Tom's data. what is the payback period if
the solar water heater system is installed, rather
than the conventional electric water heater?
(b)Chris Cook studied the same situation and de~
cided that the solar system willnotrequire the
$180 of maintenance every 4 years. Chris believes
future replacements of either the conventional
electric water heater, or the solar water heater
system can be made at the same costs and useful
lives as the initial installation. Based on a 10%
interest rate, what must be the useful life of the
solar system to make it no more expensive than
the electric water heater system?
Consider four mutually exclusive alternatives:

Cost
Uniform annual benefit

ABC D
$75.0 $50.0 $15.0 $90.0
18.8 13.9 4.5 23.8

Eachalternativehas a 5-year useful life and .no sal-
vage value. The MARR is 10%. Which alternative
should be selected, based on
(a)Future worth analysis
(b)Benefit-cost ratio analysis
(c) The payback period

I
J

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