ENGINEERING ECO ANALYSIS W/STUDY GUIDE
13th Edition
ISBN: 9780190693053
Author: NEWNAN
Publisher: Oxford University Press
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Question
Chapter 5, Problem 34P
To determine
Which of the two alternatives should be selected.
Expert Solution & Answer
Answer to Problem 34P
The option to be implemented is the automated process, since it results in an overall lower
Explanation of Solution
Given information:
Initial Cost:
Labor Intensive Process $0
Automated Process $55,000
Installation Cost:
Labor Intensive Process $0
Automated Process $15,500
Operation and Maintenance costs:
Labor Intensive Process $1,500
Automated Process $4,800
Increase in Operation and Maintenance costs:
Labor Intensive Process $200
Automated Process $600
Labor Costs:
Labor Intensive Process $116,000
Automated Process $41,000
Increase in Labor Costs:
Labor Intensive Process 4%
Automated Process 4%
Salvage Value in year 15:
Labor Intensive Process $5,000
Automated Process $19,000
Rate of Interest for Calculation: 25%
Based on the above information, the following tables outlines the
Labor Intensive Process:
| Year | Particulars | Cash flow | Present value Factor @25% | Present value |
| 0 | Installation Cost | $- | 1.0000 | $- |
| 1 | Annual Operating costs | $ 1,500.00 | 0.8000 | $ 1,200.00 |
| 2 | Annual Operating costs | $ 1,700.00 | 0.6400 | $ 1,088.00 |
| 3 | Annual Operating costs | $ 1,900.00 | 0.5120 | $ 972.80 |
| 4 | Annual Operating costs | $ 2,100.00 | 0.4096 | $ 860.16 |
| 5 | Annual Operating costs | $ 2,300.00 | 0.3277 | $ 753.71 |
| 6 | Annual Operating costs | $ 2,500.00 | 0.2621 | $ 655.25 |
| 7 | Annual Operating costs | $ 2,700.00 | 0.2097 | $ 566.19 |
| 8 | Annual Operating costs | $ 2,900.00 | 0.1678 | $ 486.62 |
| 9 | Annual Operating costs | $ 3,100.00 | 0.1342 | $ 416.02 |
| 10 | Annual Operating costs | $ 3,300.00 | 0.1074 | $ 354.42 |
| 11 | Annual Operating costs | $ 3,500.00 | 0.0859 | $ 300.65 |
| 12 | Annual Operating costs | $ 3,700.00 | 0.0687 | $ 254.19 |
| 13 | Annual Operating costs | $ 3,900.00 | 0.0550 | $ 214.50 |
| 14 | Annual Operating costs | $ 4,100.00 | 0.0440 | $ 180.40 |
| 15 | Annual Operating costs | $ 4,100.00 | 0.0352 | $ 144.32 |
| 1 | Annual Labor costs | $116,000.00 | 0.8000 | $92,800.00 |
| 2 | Annual Labor costs | $120,640.00 | 0.6400 | $77,209.60 |
| 3 | Annual Labor costs | $125,465.60 | 0.5120 | $64,238.39 |
| 4 | Annual Labor costs | $130,484.22 | 0.4096 | $53,446.34 |
| 5 | Annual Labor costs | $135,703.59 | 0.3277 | $44,470.07 |
| 6 | Annual Labor costs | $141,131.74 | 0.2621 | $36,990.63 |
| 7 | Annual Labor costs | $146,777.01 | 0.2097 | $30,779.14 |
| 8 | Annual Labor costs | $152,648.09 | 0.1678 | $25,614.35 |
| 9 | Annual Labor costs | $158,754.01 | 0.1342 | $21,304.79 |
| 10 | Annual Labor costs | $165,104.17 | 0.1074 | $17,732.19 |
| 11 | Annual Labor costs | $171,708.34 | 0.0859 | $14,749.75 |
| 12 | Annual Labor costs | $178,576.67 | 0.0687 | $12,268.22 |
| 13 | Annual Labor costs | $185,719.74 | 0.0550 | $10,214.59 |
| 14 | Annual Labor costs | $193,148.53 | 0.0440 | $ 8,498.54 |
| 15 | Annual Labor costs | $200,874.47 | 0.0352 | $ 7,070.78 |
| 15 | Salvage Value | $ (5,000.00) | 0.0352 | $(176.00) |
| Net Present value | $525,658.58 |
Automated Process:
| Year | Particulars | Cash flow | Present value Factor @25% | Present value |
| 0 | Installation Cost | $70,500.00 | 1.0000 | $70,500.00 |
| 1 | Annual Operating costs | $4,800.00 | 0.8000 | $3,840.00 |
| 2 | Annual Operating costs | $5,400.00 | 0.6400 | $3,456.00 |
| 3 | Annual Operating costs | $6,000.00 | 0.5120 | $3,072.00 |
| 4 | Annual Operating costs | $6,600.00 | 0.4096 | $2,703.36 |
| 5 | Annual Operating costs | $7,200.00 | 0.3277 | $2,359.44 |
| 6 | Annual Operating costs | $7,800.00 | 0.2621 | $2,044.38 |
| 7 | Annual Operating costs | $8,400.00 | 0.2097 | $1,761.48 |
| 8 | Annual Operating costs | $9,000.00 | 0.1678 | $1,510.20 |
| 9 | Annual Operating costs | $9,600.00 | 0.1342 | $1,288.32 |
| 10 | Annual Operating costs | $10,200.00 | 0.1074 | $1,095.48 |
| 11 | Annual Operating costs | $10,800.00 | 0.0859 | $927.72 |
| 12 | Annual Operating costs | $11,400.00 | 0.0687 | $783.18 |
| 13 | Annual Operating costs | $12,000.00 | 0.0550 | $660.00 |
| 14 | Annual Operating costs | $12,600.00 | 0.0440 | $554.40 |
| 15 | Annual Operating costs | $13,200.00 | 0.0352 | $464.64 |
| 1 | Annual Labor costs | $41,000.00 | 0.8000 | $32,800.00 |
| 2 | Annual Labor costs | $42,640.00 | 0.6400 | $27,289.60 |
| 3 | Annual Labor costs | $44,345.60 | 0.5120 | $22,704.95 |
| 4 | Annual Labor costs | $46,119.42 | 0.4096 | $18,890.51 |
| 5 | Annual Labor costs | $47,964.20 | 0.3277 | $15,717.87 |
| 6 | Annual Labor costs | $49,882.77 | 0.2621 | $13,074.27 |
| 7 | Annual Labor costs | $51,878.08 | 0.2097 | $10,878.83 |
| 8 | Annual Labor costs | $53,953.20 | 0.1678 | $9,053.35 |
| 9 | Annual Labor costs | $56,111.33 | 0.1342 | $7,530.14 |
| 10 | Annual Labor costs | $58,355.78 | 0.1074 | $6,267.41 |
| 11 | Annual Labor costs | $60,690.02 | 0.0859 | $5,213.27 |
| 12 | Annual Labor costs | $63,117.62 | 0.0687 | $4,336.18 |
| 13 | Annual Labor costs | $65,642.32 | 0.0550 | $3,610.33 |
| 14 | Annual Labor costs | $68,268.01 | 0.0440 | $3,003.79 |
| 15 | Annual Labor costs | $70,998.73 | 0.0352 | $2,499.16 |
| 15 | Salvage Value | ($19,000.00) | 0.0352 | ($668.80) |
| Net Present value | $279,221.46 |
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 the labor intensive
In case of the automated process the Installation Cost is $70,500 i.e. $55,000 for the Initial cost and $15,500 for the installation costs, Annual Operating costs are $4,800 with an increase of $600 each year. Annual Labor costs is $41,000 with an increase of 4% each year. Salvage value at the end of year 15 is $19,000.
Present value factor is calculated as 1/1.25 ^ N where N is the year of operation
Conclusion:
Hence the process to be implemented is the automated process since it results in lower overall cash flow for a period of 15 years.
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Chapter 5 Solutions
ENGINEERING ECO ANALYSIS W/STUDY GUIDE
Ch. 5 - Prob. 1QTCCh. 5 - Prob. 2QTCCh. 5 - Prob. 3QTCCh. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7P
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