Engineering Economic Analysis

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What Is the Basic Comparison? 405

A new piece of production machinery has the following costs.

Investment cost. =$25,000

Annual operating and maintenance cost=$2000 the first year and increasing

at $500 per year thereafter

Annual cost for risk of breakdown =$5000 per year for 3ye~s, then

increasing by $1500 per year thereafter

Usefullife =7 years

MARR =15%per year

Calculate the marginal cost of keeping this ass~t over its useful life.

SOLUTION

From the problem data we call easily find tbe marginal costs for O&M and risk of breakdowns.

However, to calculate the marginal capital recovery cost, we need estimates of the year-to-year

market value: the prices of the production machinery would bring over its 7-year useful life.

Market value estimates were made as follows:

. I I t I I I

We can now calculate themarginal cost(year-to-year cost o,f ownership) of the production

machinery over its 7-year useful life.

Cost of Total

O&M Breakdown Marginal

Loss in Market Forgone Interest Costin Risk Cost

Value in Yearn in Y~arn Yearn in Yearn in Yearn

2,5,000- 18,000 =$7000 25,000(0.15) = $3750 $2000' $5,000 $1.7;750

18,000 - 13,000= 5000 18,000(0.15) == 2700 2500 5,000 15,200

d3,ooQ- 9,000= 4000 13,000(0.15)= 1950 3000 5,000 13,950

9,000 - 6,000= 3000 9,000(0.15) == 1350 3500 6,500 14,350

6,000 -'- 4,000 = 2000 6,000(0.15) = 900 4000 8,000 14,'900-

4,000- 3,000= 1000 4,000(0.15).~. 600 45QO 9,500 15,~OQ

3,000- 2,500== 500 3,000(0,15)' 450 5000 11,odb 16,950

'NpticeC'thflfthefatalrn1irgiilafcosrJdfea~ Y'eaf'.j$mad~~~p=o!,fuss1'0.l11arketvalue, fot:golle

intere~~,O&M cost, and cost for risk of breakdowns. AsaIIe~fu1J.ple,theYear-5.:marginalcostof

_ '='==$14,900 is calculated as 2,000+ 900 + 4,000 + 8,000.' = =:!!I 101 "'= _:llt_ ~I!!I::Ii= -=. -= "= 'll'a=

,.--~

IYear,n

1 2 3 4 5 6 7

Year .Market Value

I $18,000

(^2) 13,000
(^3) 9,000 I , it
(^4) 6,000
(^5) 4,000
(^6) 3,000
II
(^7) 2,500