Engineering Economic Analysis
13th Edition
ISBN: 9780190296902
Author: Donald G. Newnan, Ted G. Eschenbach, Jerome P. Lavelle
Publisher: Oxford University Press
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Question
Chapter 5, Problem 30P
To determine
Which of the three alternative refrigerators should be purchased.
Expert Solution & Answer
Answer to Problem 30P
Equipment to be purchased is Foxhill instrument, based on
Explanation of Solution
Given information:
Installation Costs in Year 0:
Foxhill Instrument $35,000
Quicksilver $40,000
Almaden $100,000
Annual Energy costs for Years 1-20:
Foxhill Instrument $8,000
Quicksilver $7,000
Almaden $2,000
Annual Income:
Foxhill Instrument $2,000
Quicksilver $2,200
Almaden $3,500
Salvage Value in year 20:
Foxhill Instrument $20,000
Quicksilver 0
Almaden 0.
Based on the above information, the following tables outlines the net present value calculation of the equipment of Foxhill Instrument, Quicksilver, and Almaden.
Foxhill Instrument:
| Year | Particulars | Cash flow | Present value Factor @10% | Present value |
| 0 | Installation Cost | $35,000.00 | 1 | $35,000.00 |
| 1 | Operating costs less Revenue | $6,000.00 | 0.9091 | $5,454.55 |
| 2 | Operating costs less Revenue | $6,000.00 | 0.8264 | $4,958.68 |
| 3 | Operating costs less Revenue | $6,000.00 | 0.7513 | $4,507.89 |
| 4 | Operating costs less Revenue | $6,000.00 | 0.6830 | $4,098.08 |
| 5 | Operating costs less Revenue | $6,000.00 | 0.6209 | $3,725.53 |
| 6 | Operating costs less Revenue | $6,000.00 | 0.5645 | $3,386.84 |
| 7 | Operating costs less Revenue | $6,000.00 | 0.5132 | $3,078.95 |
| 8 | Operating costs less Revenue | $6,000.00 | 0.4665 | $2,799.04 |
| 9 | Operating costs less Revenue | $6,000.00 | 0.4241 | $2,544.59 |
| 10 | Operating costs less Revenue | $6,000.00 | 0.3855 | $2,313.26 |
| 11 | Operating costs less Revenue | $6,000.00 | 0.3505 | $2,102.96 |
| 12 | Operating costs less Revenue | $6,000.00 | 0.3186 | $1,911.78 |
| 13 | Operating costs less Revenue | $6,000.00 | 0.2897 | $1,737.99 |
| 14 | Operating costs less Revenue | $6,000.00 | 0.2633 | $1,579.99 |
| 15 | Operating costs less Revenue | $6,000.00 | 0.2394 | $1,436.35 |
| 16 | Operating costs less Revenue | $6,000.00 | 0.2176 | $1,305.77 |
| 17 | Operating costs less Revenue | $6,000.00 | 0.1978 | $1,187.07 |
| 18 | Operating costs less Revenue | $6,000.00 | 0.1799 | $1,079.15 |
| 19 | Operating costs less Revenue | $6,000.00 | 0.1635 | $981.05 |
| 20 | Operating costs less Revenue | $6,000.00 | 0.1486 | $891.86 |
| 20 | Salvage Value | ($20,000.00) | 0.1486 | ($2,972.87) |
| Net cash outflow | $83,108.51 |
Quicksilver:
| Year | Particulars | Cash flow | Present value Factor @10% | Present value |
| 0 | Installation Cost | $40,000.00 | 1.0000 | $40,000.00 |
| 1 | Operating costs less Revenue | $4,800.00 | 0.9091 | $4,363.64 |
| 2 | Operating costs less Revenue | $4,800.00 | 0.8264 | $3,966.94 |
| 3 | Operating costs less Revenue | $4,800.00 | 0.7513 | $3,606.31 |
| 4 | Operating costs less Revenue | $4,800.00 | 0.6830 | $3,278.46 |
| 5 | Operating costs less Revenue | $4,800.00 | 0.6209 | $2,980.42 |
| 5 | Operating costs less Revenue | $4,800.00 | 0.6209 | $2,980.42 |
| 6 | Operating costs less Revenue | $4,800.00 | 0.5645 | $2,709.47 |
| 7 | Operating costs less Revenue | $4,800.00 | 0.5132 | $2,463.16 |
| 8 | Operating costs less Revenue | $4,800.00 | 0.4665 | $2,239.24 |
| 9 | Operating costs less Revenue | $4,800.00 | 0.4241 | $2,035.67 |
| 10 | Operating costs less Revenue | $4,800.00 | 0.3855 | $1,850.61 |
| 11 | Operating costs less Revenue | $4,800.00 | 0.3505 | $1,682.37 |
| 12 | Operating costs less Revenue | $4,800.00 | 0.3186 | $1,529.43 |
| 13 | Operating costs less Revenue | $4,800.00 | 0.2897 | $1,390.39 |
| 14 | Operating costs less Revenue | $4,800.00 | 0.2633 | $1,263.99 |
| 15 | Operating costs less Revenue | $4,800.00 | 0.2394 | $1,149.08 |
| 16 | Operating costs less Revenue | $4,800.00 | 0.2176 | $1,044.62 |
| 17 | Operating costs less Revenue | $4,800.00 | 0.1978 | $949.65 |
| 18 | Operating costs less Revenue | $4,800.00 | 0.1799 | $863.32 |
| 19 | Operating costs less Revenue | $4,800.00 | 0.1635 | $784.84 |
| 20 | Operating costs less Revenue | $4,800.00 | 0.1486 | $713.49 |
| 20 | Salvage Value | 0 | 0.1486 | $0.00 |
| Net cash outflow | $83,845.53 |
Almaden:
| Year | Particulars | Cash flow | Present value Factor @10% | Present value |
| 0 | Installation Cost | $100,000.00 | 1.0000 | $100,000.00 |
| 1 | Operating costs less Revenue | ($1,500.00) | 0.9091 | ($1,363.64) |
| 2 | Operating costs less Revenue | ($1,500.00) | 0.8264 | ($1,239.67) |
| 3 | Operating costs less Revenue | ($1,500.00) | 0.7513 | ($1,126.97) |
| 4 | Operating costs less Revenue | ($1,500.00) | 0.6830 | ($1,024.52) |
| 5 | Operating costs less Revenue | ($1,500.00) | 0.6209 | ($931.38) |
| 5 | Operating costs less Revenue | ($1,500.00) | 0.6209 | ($931.38) |
| 6 | Operating costs less Revenue | ($1,500.00) | 0.5645 | ($846.71) |
| 7 | Operating costs less Revenue | ($1,500.00) | 0.5132 | ($769.74) |
| 8 | Operating costs less Revenue | ($1,500.00) | 0.4665 | ($699.76) |
| 9 | Operating costs less Revenue | ($1,500.00) | 0.4241 | ($636.15) |
| 10 | Operating costs less Revenue | ($1,500.00) | 0.3855 | ($578.31) |
| 11 | Operating costs less Revenue | ($1,500.00) | 0.3505 | ($525.74) |
| 12 | Operating costs less Revenue | ($1,500.00) | 0.3186 | ($477.95) |
| 13 | Operating costs less Revenue | ($1,500.00) | 0.2897 | ($434.50) |
| 14 | Operating costs less Revenue | ($1,500.00) | 0.2633 | ($395.00) |
| 15 | Operating costs less Revenue | ($1,500.00) | 0.2394 | ($359.09) |
| 16 | Operating costs less Revenue | ($1,500.00) | 0.2176 | ($326.44) |
| 17 | Operating costs less Revenue | ($1,500.00) | 0.1978 | ($296.77) |
| 18 | Operating costs less Revenue | ($1,500.00) | 0.1799 | ($269.79) |
| 19 | Operating costs less Revenue | ($1,500.00) | 0.1635 | ($245.26) |
| 20 | Operating costs less Revenue | ($1,500.00) | 0.1486 | ($222.97) |
| 20 | Salvage Value | $ - | 0.1486 | $0.00 |
| Net cash outflow | $86,298.27 |
Net present value is the difference of Sum of Present values of cash inflows and Sum of Present values of cash outflows. If the value is positive then the project may be accepted. While evaluation of two or more alternatives takes place, then the proposal with the higher net present value may be selected since it results in a greater
In the given scenario, Present values are calculated by calculating the present values of cash inflows in the form of salvage value and cash outflows such as installation cost and operating cost.
In case of Foxhill, Installation Cost is $35,000, Operating costs less Revenue is $6,000 i.e. Operating costs of $8,000 less Revenues of $2,000 and Salvage value is $20,000. In case of Quicksilver, Installation Cost is $40,000, Operating costs less Revenue is $4,800 i.e. Operating costs of $7,000 less Revenues of $2,200 and Salvage value is $0. In case of Almaden, Installation Cost is $100,000, Operating costs less Revenue is ($1,500) i.e. Operating costs of $2,000 less Revenues of $3,500 and Salvage value is $0.
Present value factor is calculated as 1/1.10 ^ N where N is the year of operation of the equipment.
Conclusion:
Hence the equipment with the lowest cash outflows over a period of 20 years is selected.
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Chapter 5 Solutions
Engineering Economic Analysis
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