Handbook of Civil Engineering Calculations

Notational System

Here P = initial cost of asset acquired in the proposed scheme; L ~ salvage value of the as-
set; N= life of asset, years; J 1 = interest rate; c = sum of annual costs of operation, main-
tenance, etc., that are assumed to remain constant for the asset life; A = annual cost -(P-
L)(CR) + Li 1 + c, where CR is the capital-recovery factor from the compound-interest ta-
bles for / = /!,« = Af; other symbols are as defined earlier. Also, A = (P- L)(SFP) + Pi 1 +
c, for the same interest and life as the above annual-cost relation.

DETERMINATION OFANNUAL COST

OFANASSET

A firm contemplates building a new warehouse. A choice is to be made between a brick
and a galvanized-iron structure. The cost data associated with each structure are as fol-
lows:

Brick Galvanized iron

First cost, $ 80,000 36,000

Salvage value, $ 15,000 4,000

Life, years 40 15

Annual maintenance cost, $ 1,000 2,300

Annual taxes, $/$ 1OO 1.30 1.30

Annual insurance, $/$ 1000 2 5

If this firm earns 6 percent on its invested capital, which type of structure is the more
economical one?

Calculation Procedure:

1. Compute the operating and maintenance costs
   For the brick building, the annual operating and maintenance cost = c = maintenance cost
   per year, $ + annual taxes, $ + annual insurance cost, $, or $1000 +• 0.013($80,000) +
   0.002($80,000) = $2200.
   For the galvanized-iron building, c = $2300 + 0.013($36,000) + 0.005($36,000) =
   $2948.


2. Compute the annual cost of each building
   Use the capital-recovery equation. Thus, for the brick building, A = ($80,000 -
   $15,000)(0.06646) + $15,000)(0.06) + $2200 = $7420.
   For the galvanized-iron building, A = ($36,000 - $4000)(0.10296) + $4000(0.06) +
   $2948 = $6483.
   Since the galvanized-iron building has a lower annual cost, it is the more economical
   structure.
   Related Calculations: This general method of computing annual costs can be
   used for any number of industrial or commercial assets regardless of whether they are sta-
   tionary, moving, or water- or air-borne. The key fact is that accurate costs are required if
   the annual cost comparison is to have validity.