An airline is considering two types of engine systems for use in its planes. Each has the same life and the same maintenance and repair record. System A costs $100,000 and uses 38,000 gallons per 1,000 hours of operation at the average load encountered in passenger service. System B costs $340,000 and uses 27,000 gallons per 1,000 hours of operation at the same level. Both engine systems have three-year lives before any major overhaul is required. On the basis of the initial investment, the systems have 1% salvage values. If jet fuel costs $2.32 a gallon (year 1) and fuel consumption is expected to increase at the rate of 10% per year because of degrading engine efficiency, which engine system should the firm install? Assume 3,000 hours of operation per year and a MARR of 11%. Use the AE criterion. What is the equivalent operating cost per hour for each engine? Assume an end-of-year convention for the fuel cost.
An airline is considering two types of engine systems for use in its planes. Each has the same life and the same maintenance and repair record. System A costs $100,000 and uses 38,000 gallons per 1,000 hours of operation at the average load encountered in passenger service. System B costs $340,000 and uses 27,000 gallons per 1,000 hours of operation at the same level. Both engine systems have three-year lives before any major overhaul is required. On the basis of the initial investment, the systems have 1% salvage values. If jet fuel costs $2.32 a gallon (year 1) and fuel consumption is expected to increase at the rate of 10% per year because of degrading engine efficiency, which engine system should the firm install? Assume 3,000 hours of operation per year and a MARR of 11%. Use the AE criterion. What is the equivalent operating cost per hour for each engine? Assume an end-of-year convention for the fuel cost.
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