Background and Information Mohamad, owner of an residential furnished apartment's in Dubai, performed an economic analysis 4 years ago when he decided to place an new eefficient central AC unit for each apartments instead of old split units windows type in each room. The estimates used and the annual worth analysis at MARR = 12% are summarized below. Two different AC brands were compared. LG York Cost and installation, $ −26,000 −36,000 Annual maintenance cost, $ per year −800 −300 Salvage value, $ 2,000 3,000 Electrical power savings, $ per year 25,000 35,000 Useful life, years 7 10 The spreadsheet in below sheet is the one Mohamad used to make the decision. York was the clear choice due to its substantially larger AW value, hence York AC units were installed. MARR 12% LG York Investment Annual Repair Investment Annual Repair Years and salvage maintenance savings and salvage maintenance savings 0 -$26,000 $0 $0 -$36,000 $0 $0 1 $0 -$800 $25,000 $0 -$300 $35,000 2 $0 -$800 $25,000 $0 -$300 $35,000 3 $0 -$800 $25,000 $0 -$300 $35,000 4 $0 -$800 $25,000 $0 -$300 $35,000 5 $0 -$800 $25,000 $0 -$300 $35,000 6 $0 -$800 $25,000 $0 -$300 $35,000 7 $2,000 -$800 $25,000 $0 -$300 $35,000 8 $0 -$300 $35,000 9 $0 -$300 $35,000 10 $3,000 -$300 $35,000 AW element -$6,068 -$800 $25,000 -$7,025 -$300 $35,000 Total AW $18,701.17 $28,499.52 During a quick review (year 4 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 4 years ago. In fact, the maintenance contract cost is going from $300 this year (year 4) to $1200 per year next year and will then increase 7% per year for the next 6 years. Also, the electrical power savings for the last 4 years were $31,312 ( year 1) , $27,565 ( year 2), $30,493( year3), and $32,903( year4), as best as Mohamad can determine. He believes savings will decrease by $3,349 per year hereafter. Finally, these 4-year-old AC units are worth nothing on the market now, so the salvage is zero, not $3000. Q1 - With these new estimates, What is the AW of the Investment and Salvage value for YORK AC unit? Q2 - With these new estimates, What is the FW of the Investment and Salvage value for YORK AC unit? Q3 - With these new estimates, what is the recalculated AW maintenance cost for the YORK AC units?
CASE STUDY
ANNUAL WORTH ANALYSIS—THEN AND NOW
Background and Information
Mohamad, owner of an residential furnished apartment's in Dubai, performed an economic analysis 4 years ago when he decided to place an new eefficient central AC unit for each apartments instead of old split units windows type in each room. The estimates used and the annual worth analysis at MARR = 12% are summarized below. Two different AC brands were compared.
| LG | York | |
| Cost and installation, $ | −26,000 | −36,000 |
| Annual maintenance cost, $ per year | −800 | −300 |
| Salvage value, $ | 2,000 | 3,000 |
| Electrical power savings, $ per year | 25,000 | 35,000 |
| Useful life, years | 7 | 10 |
The spreadsheet in below sheet is the one Mohamad used to make the decision. York was the clear choice due to its substantially larger AW value, hence York AC units were installed.
| MARR | 12% | |||||
| LG | York | |||||
| Investment | Annual | Repair | Investment | Annual | Repair | |
| Years | and salvage | maintenance | savings | and salvage | maintenance | savings |
| 0 | -$26,000 | $0 | $0 | -$36,000 | $0 | $0 |
| 1 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 2 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 3 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 4 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 5 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 6 | $0 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 7 | $2,000 | -$800 | $25,000 | $0 | -$300 | $35,000 |
| 8 | $0 | -$300 | $35,000 | |||
| 9 | $0 | -$300 | $35,000 | |||
| 10 | $3,000 | -$300 | $35,000 | |||
| AW element | -$6,068 | -$800 | $25,000 | -$7,025 | -$300 | $35,000 |
| Total AW | $18,701.17 | $28,499.52 |
During a quick review (year 4 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 4 years ago. In fact, the maintenance contract cost is going from $300 this year (year 4) to $1200 per year next year and will then increase 7% per year for the next 6 years. Also, the electrical power savings for the last 4 years were $31,312 ( year 1) , $27,565 ( year 2), $30,493( year3), and $32,903( year4), as best as Mohamad can determine. He believes savings will decrease by $3,349 per year hereafter. Finally, these 4-year-old AC units are worth nothing on the market now, so the salvage is zero, not $3000.
Q1 - With these new estimates, What is the AW of the Investment and Salvage value for YORK AC unit?
Q2 - With these new estimates, What is the FW of the Investment and Salvage value for YORK AC unit?
Q3 - With these new estimates, what is the recalculated AW maintenance cost for the YORK AC units?
Q4 - With these new estimates, what is the recalculated PW maintenance cost for the YORK AC units?
Q5 - With these new estimates, what is the recalculated Total AW for YORK AC units.
Q6 - With these new estimates, what is the recalculated Total FW for YORK AC units.
Q7 - With these new estimates, what is the recalculated Total PW for YORK AC units.
Q8 - If these estimates had been made 4 years ago, would YORK still have been the economic choice, why explain your answer
Q9 - What is difference in capital recovery amount for the YORK units with these new estimates?
Q10 - If MARR is changed to 8% for the upcoming 6 years what will be the Total PW for the YORK units?
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