Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 26P

(a):

To determine

Calculate the annual worth.

(a):

Expert Solution
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Explanation of Solution

Defender: Market value (MV) is $7,000. Upgrade cost (UC) is $22,000. Annual operating cost (AC) is $27,000. Salvage value (SV) is $21,000. Time period (n) is 3. Interest rate (i) is 10%.

Challenger: First cost (FC) is $65,000. Annual operating cost (AC) is $14,000. Salvage value (SV) is $123,000. Time period (n) is 3. Interest rate (i) is 10%.

Annual worth (AV) of the defender can be calculated as follows:

AV=(MV+UC)(i(1+i)n(1+i)n1)AC+SV(i(1+i)n1)=(7,000+22,000)(0.1(1+0.1)3(1+0.1)31)27,000+12,000(0.1(1+0.1)31)=29,000(0.1(1.331)1.3311)27,000+12,000(0.11.3311)=29,000(0.13310.331)27,000+12,000(0.10.331)=29,000(0.402115)27,000+12,000(0.302115)=11,661.3427,000+3,625.38=35,035.96

The annual worth of the defender is -$35,035.96.

Annual worth (AV) of the challenger can be calculated as follows:

AV=FC(i(1+i)n(1+i)n1)AC+SV(i(1+i)n1)=65,000(0.1(1+0.1)3(1+0.1)31)14,000+23,000(0.1(1+0.1)31)=65,000(0.1(1.331)1.3311)14,000+23,000(0.11.3311)=65,000(0.13310.331)14,000+23,000(0.10.331)=65,000(0.402115)14,000+23,000(0.302115)=26,137.4814,000+6,948.65=33,188.83

The annual worth of the challenger is -$33,188.83. Since the annual worth of cost for challenger is lesser than the defender, replace the defender with the challenger.

(b):

To determine

Calculate the annual worth for 2 year.

(b):

Expert Solution
Check Mark

Explanation of Solution

Annual worth (AV) of the challenger can be calculated as follows:

AV=FC(i(1+i)n(1+i)n1)AC+SV(i(1+i)n1)=65,000(0.1(1+0.1)2(1+0.1)21)14,000+23,000(0.1(1+0.1)21)=65,000(0.1(1.21)1.211)14,000+23,000(0.11.211)=65,000(0.1210.21)14,000+23,000(0.10.21)=65,000(0.57619)14,000+23,000(0.47619)=37,452.3514,000+10,952.37=40,499.98

The annual worth of the challenger is -$40,499.98. Since the annual worth of 2 year cost for challenger is greater than the defender for 3 year cost, retain the defender.

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