A project engineer wid1 EnvironCare is assigned to start up a new office in a city

where a 6-year contract has been finaliz.ed to collect and analyze ozone-level
readings. Two lease options are available, each wid1 a first cost, allllual lease cost,
and deposit-retum estimates shown below. The MARR is 15% per year.

Location A Location B

First cost, S - 15.000 -18,000

Annual lease cost, S per year -3.500 -3,100
Deposit rerurn, S 1.000 2,000
Lease term. years 6 9

a. EnvironCare has a practice of e\<-aluating all projects over a 5-year period.

If the deposit rerums are not expected to change. which location should be
selected?
b. Perform the analysis using an 8-year planning horizon.
c. Determine which lease option should be selected on the basis of a present
worth comparison using the LCM.
Solution
a. For a 5-year study period, use the estimated deposit retums as positive cash
flows in year 5.
PWA = - 15,000 - 3500(P/A.15%.5) + lOOO(P/ F ,15%,5)
= $ -26,236
PW8 = - 18,000 - 3 100(P/A.15%,5) + 2000(P / F ,15%,5)
= $ -27,3 97
, Location A is die better economic choice.
b. For an 8-year srudy period, die deposit retum for B remains at $2000 in
year 8. For A, an estimate for equivalent service for die additional 2 years is
needed. AsSllllle this is expected to be relatively expensive at $6000 per year.
PWA = -15,000 - 3500(P/A,15%.6) + IOOO(P/ F ,15%,6)
- 6000(P/A, 15%,2)(P/F. 15%.6)
= $-32,030
PWs = - 18,000 - 3 100(P/A.15%,8) + 2000(P / F,15%,8)
= $-31 ,257
Location B has an economic advantage for this longer study period.
c . Since the leases ha\·e different terms. compare diem over the LCM of
18 years. For life cycles after the first. the first cost is repeated at the begin-
ning (year 0) of each new cycle , which is the last year of the P=-ious cycle.
These are years 6 and 12 for location A and year 9 for B. The cash flow dia-
gram is in Figure 4.2.
PWA = - 15,000 - 15,000(P/F.15%.6) + lOOO(P / F , 15%,6)
- 15,000(P / F ,15%.12) + IOOO(P / F ,15%.12)
+ l OOO(P/F. 15%,18) - 3500(P/A. 15%.18)
= S-45,036
PW8 = - 18,000 - 18,000(P/F.15%.9) + 2000(P/ F,15%,9)
+ 2000(P/F,15%,18) - 3 100(P/A,15%,18)
= S-41,384
Location B is selected.

PWA = ?

• $1000 $1000 $1000

1 2 6 12 16 17 18

$15,000
l
S!S,000
$3500
l
SIS.000
Loc:1bon.~

S2000 S2 000
1 2 9 16 17 18

•
$18,000
i
SIS.000
$3100

Loc:anonB
A quarry outside of Austin, Texas wishes to evaluate two similar pieces of equip-
ment by which the company can meet new state enviromnental requirements for
dust emissions. The MARR is 12% per year. Detennine which alternative is
economically better using (a) the AW method, and (b) AW method with a 3-year
study period.

Equipment x y

First cost, $ 40,000 75,000

AOC, $ per year 25,000 15,000
Life, years 4 6
Salvage value, $ 10,000 7,000
Estimated value
after 3 years, $ 14,000 20,000

Solution
a. Calculating AW values over the respective lives indicates that Y is the bet-
ter alternative.
AWx = -40,000(A/P,12%,4) - 25,000 + 10,000(A/ F,12%,4)
= $-36,077
AWy = -75,000(A/P,12%,6) - 15,000 + 7,000(A/ F ,12%,6)
= $-32,380
b. All n values are 3 years and the "salvage values" become the estimated
market values after 3 years. Now X is economically better.
AWx = -40,000(A/P,12%,3) - 25,000 + 14,000(A/ F , 12%,3)
= $-37,505
AW1· = -75,000(A/P,12%,3) - 15,000 + 20,000(A/F,12%,3)
= $-40,299
 The Army Corps of Engineers wants to construct a dam on a flood-prone river.
The estimated constmction cost and average annual dollar benefits are listed
below. A 6% per year rate applies and dam life is infinite for analysis purposes.
(a) Select the one best location using the B/C method. (b) If the sites are now
considered independent projects, which sites are acceptable?

Construction Cost, Annual

Site S millions Benefits, S

A 6 350,000
B 8 420,000
c 3 125,000
D 10 400,000
E 5 350,000
F 11 700,000

Solution
a. The capitalized cost A = Pi is used to obtain AW values of the constmction
1 cost., as shown in the first row of Table 7.2. Since benefits are estin1ated

TABLE 7.2 Use of Incremental B/C Rat io Analysis for Example 7.5 (Values in $1000)
DN c E A B D F

AW of cost, $/year 0 180 300 360 480 600 660

Annual benefits, $/year 0 125 350 350 420 400 700
Site B/C 0.69 1.17 0.97 0.88 0.67 1.06
Comparison C-to-DN E-tG-DN A-to-E B-tG-E D-tG-E F-to-E

0. Annual cost, $/year 180 300 60 180 300 360

0. Annual benefits, $/year 125 350 0 70 50 350
0. B/C ratio 0.69 1.17 0.39 0.17 0.97
Increment justified? No Yes No No No No
Site selected DN E E E E E

directly, initial comparison with DN is necessary. For the analysis, sites are
ordered by increasing AW-of-cost values. This is DN, C, E, A, B, D, and
F. The analysis between the ordered mutually exclusive alternatives is
detailed in the lower portion of Table 7.2. Since only site E is incremen-
tally justified, it is selected.
b. The dan1 site proposals are now independent projects. The site B/C ratio is
used to select from none to all six sites. h1 Table 7.2, third row, B/C > 1.0
for sites E and F only; they are acceptable.