Exercise 1

Table E1: Cost data

Initial Annual
Alternative investment operation and Salvage value Life (years)
cost maintenance
A RM525,000 RM26,000 --- 50
B RM312,000 RM48,000 RM50,000 25

Question: Determined the economically optimum plan if the annual interest rate is 8
percent.

Exercise 2
The following alternative plans reducing flood damages along a reach of a river are
being considered:
Plan 1 channel improvement consisting of widening and straightening the river reach
Plan 2 dam A
Plan 3 dam B, which is same location but is larger than dam A
Plan 4 both the channel improvement and dam A
Plan 5 both the channel improvements and dam B
A 50-year period of analysis has been adopted with interest rate of 7%.

Table E2: Total annual cost comparison

Initial investment Operation and Average annual
Plan
(RM) Maintenance (RM) damages (RM)
No project 0 0 525,000
Plan 1 380,000 125,000 312,000
Plan 2 1,620,000 77,000 238,000
Plan 3 1,970,000 113,000 156,000
Plan 4 2,000,000 202,000 125,000
Plan 5 2,350,000 238,000 83,000

Question: Select the optimum plan based on the objective of minimizing total annual
cost